What is the firm weighted average cost of capital

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Reference no: EM132857010

Question - The Global Advertising Company has a marginal tax rate of 40 percent. The company can raise debt at a 12 percent interest rate and the last dividend paid by Global was $0.90. Global's common stock is selling for $8.59 per share, and its expected growth rate in earnings and dividends is 5 percent. If Global issues new common stock, the flotation cost incurred will be 10 percent. Global plans to finance all capital expenditures with 30 percent debt and 70 percent equity.

Required -

1. What is Global's cost of retained earnings if it can use retained earnings rather than issue new common stock?

2. What is the cost of common equity raised by selling new stock?

3. What is the firm's weighted average cost of capital if the firm has sufficient retained earnings to fund the equity portion of its capital budget?

Reference no: EM132857010

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