Explain what is the cost of financing and wacc

Reference no: EM1315549

Explain What is the cost of financing and WACC

Bonds - The G Company has 10,000 bonds outstanding. The bonds are selling at 101% of face value, have a 7% coupon rate, pay interest annually, and mature in 9 years.

Preferred shares - There are 500,000 shares of 8% preferred stock ($100 stated value) outstanding with a current market price of $91 a share.

Common shares - In addition, there are 1.25 million shares of common stock outstanding with a market price of $63 a share and a beta of .97.

The common stock paid a total of $1.20 in dividends last year and expects to increase those dividends by 3% annually.
Other - The firm\'s marginal tax rate is 35%. The overall stock market is yielding 11% and the Treasury bill rate is 3.5%.

REQUIRED:

a) What is the cost of financing using preferred stock?

b) What is the cost of equity based on the dividend growth model? What is the cost of equity based on the security market line? Which is more reasonable?

c) What is the after-tax cost of debt financing?

d) What is the WACC of the Gitman Company?

e) Assume the above capital structure is considered optimal; next year\'s expected income is $10,000,000, and no change in dividend policy. What amount of projects could the firm finance before needing to issue new common shares? i.e. What is the common equity breakpoint?

f) Assuming a 5% flotation cost for each financing source, what would be the marginal cost of capital (MCC) for financing above the breakpoint you determined in part e?

Reference no: EM1315549

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