What is abc component cost of debt

Reference no: EM13295873

ABC Corporation has a target capital structure consisting of 30% debt and 70% common equity. Assume the firm has insufficient retained earnings to fund the equity portion of its capital budget. It has 20-year, 13% semiannual coupon bonds that sell at their par value of $1,000. ABC's stock beta is 1.2, the risk-free rate is 7%, and the market risk premium is 8%. ABC is a constant growth firm that just paid a dividend of $1.50, sells for $18.84 per share, and has a growth rate of 8%. Flotation costs on new common stock total 10%, and the firm's marginal tax rate is 40%.

a) What is ABC's component cost of debt?
b) What is ABC's cost of retained earnings using the CAPM approach?
c) What is ABC's cost of retained earnings using the DCF approach?
d) What is ABC's WACC, if the firm has insufficient retained earnings to fund the equity portion of its capital budget?

Reference no: EM13295873

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