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A firm is raising funds by selling a package of equity, debt and preferred stock.
The details of the package are:
1) Equity sold for $20 million. Expected perpetual dividends to buyers is $2 million per year.
2) Preferred stock sold for $10 million. Expected perpetual dividends to buyers 6.90% per year.
3) Debt sold for $29.65, perpetual risk-less (guaranteed) coupon payments to be $1.5 million a year.
Assume no taxes and other Modigliani-Miller assumptions also hold.
What is the WACC for the firm?
A cash dividend is declared and paid. Merchandise is sold at a profit, but the sale is on credit. Long-term bonds are retired with the proceeds of a preferred stock issue. Missing inventory is written off against retained earnings.
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Company Stock and Cost of Capital Analysis
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