Reference no: EM131016076
Austen Enterprises has the following capital structure based on market values which is considered to be optimal:
Bonds $350,000
Preferred Stock 50,000
Common Equity 600,000
For the coming year, management expects to realize $1,000,000 in net income that can either be paid out as dividends or retained. The past dividend policy of paying out 45% of income will continue. The marginal tax rate is 40%.
Information pertaining to the component sources is as follows:
Bonds: New bonds will be issued with an 8 percent coupon rate paid annually. The bonds will mature in 30 years. The flotation cost is 3 percent of par.
Preferred Stock: New preferred stock will have a par value of $95 per share and a dividend rate of 10 percent. The flotation cost of the preferred stock is $4 per share.
Common Stock: The current market price of common stock is $20 per share. The current dividend that is being paid is $1.10 per share, and the expected growth rate is 9 percent. New common equity can be sold at a flotation cost of 15 percent.
(a) Find the required return for new bondholders and the after-tax cost of debt.
(b) Find the required return for new preferred stockholders and the after-tax cost of preferred.
(c) Find the required return for new common stockholders, the after-tax cost of internal common equity, and the after-tax cost of external common equity.
(d) Find the break point for the WACC.
(e) Calculate the WACC's
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