Reference no: EM133305530

Robert Bernard is an investment analyst employed to JMMB. He was requested to assess the capital structure of Worthy Park Estate Rums and has provided the following information:

Preferred Stock: 13 000 shares of 8 percent preferred stock issued at $100.00 per share. Current market price is $80 per share.

Common Stock: 60 000 shares outstanding, selling for $105 per share. The current treasury bill rate is 12% and the stock's beta is 1.50. The expected rate of return on the average stock in the market is 16%.

Debt: The firm can borrow funds at 23% interest per year. Assume that the tax rate is 30%.

1. Using the information above to calculate the firm's WACC if the target capital structure comprises 40% debt, 20% preferred stock and 40% common stock.

2. If the beta of the stock was two and the firm's capital structure was modified to 40% debt, 10% preferred stock, and 50% common, what is the firm's WACC?

3. The firm is expected to pay a year end dividend of $10.00 per share at year end and its flotation cost if 10%. Investors have projected an expected growth rate of 8% per annum.

1. What is the cost of retained earnings using the discounted cash flow approach?

2. Calculate the cost of issuing new common stock.