Reference no: EM132516220
HHM Incorporation wants to calculate its overall cost of capital. The company is in the 40% tax bracket, the financial manager has gathered the following information; Common stock: the company's common stock is currently selling at $15 per share and expects to pay dividend of $0.40 per share in the next year. The company dividend has been growing at an annual rate of 8% and this rate is expected to continue in the future. The company is expected to have $300,000 of retained earnings available in the coming year, once these retained earnings are exhausted, the firm will issue new common stock. The new common stock will be underpriced by 0.50 per share, and the floatation costs are $0.30 per share.
Preferred stock: The Company issued 10% of preferred stock at its $100per share value. The cost of issuing and selling the preferred stock is expected to be $2 per share.
Long term Debt; The Company can raise debt issuing at $1,000 par value, 12% coupon interest rate, 10-year bonds. It has to sell the bond at a discount of $20 per bond and must pay the floatation costs of $15 per bond.
Required: a. Calculate the Individual cost of each source of financing.
b. What is the company's WACC using the weights shown in the table given below;
Source of Capital Weight
Common stock 55%
Preferred Stock 15%
Long term debt 30%
Total 100
c. What is the company's WACC if the weights in the table have been adjusted as follows; (5 marks)
Source of Capital Weight
Common stock 35%
Preferred Stock 15%
Long term debt 50%
Total 100