What is the component cost of common equity for the firm

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Reference no: EM131562611

Your firm has a market value weighted target capital structure of $2,000,000 in debt outstanding, $500,000 in preferred stock, and $10,000,000 in common stock which it is currently preparing to issue. The firms' bonds are outstanding with 10 years left till maturity and are currently trading at a discount price of $947. The bonds pay a semiannual coupon at 6% annual rate, and have a par value of $1,000. The firm has preferred stock with a par value of $100 on which it pays a 6% dividend. Right now, the preferred stock is selling at $96 per share. The firm can issue their new common stock at a $40 per share. The new common stock will pay a dividend of $2 per share, and the dividends are expected to grow at 4% indefinitely. Goldman Sachs is in charge of preparing the stock issuance, and will charge the firm 10% to do so. Tax rate is 40%.

a) What is the before tax component cost of debt for the firm?

b) What is the component cost of common equity for the firm?

c) What is the component cost of preferred equity for the firm?

d) Find the WACC.

Reference no: EM131562611

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