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Assume Eternalife Company has the following capital structure, which it considers to be optimal: debt 30%, preferred stock 20%, and common stock 50%. The company's tax rate is 30%. Investors expect earnings and dividends to grow at a constant rate of 10% in the future. Eternalife Company paid a dividend of Br. 4.50 per share last year and its stock currently sells at a price of Br. 50 per share. Five-year treasury bonds yield 5%, the market risk premium is 4%, and Eternalife beta is 1.2. The following terms would apply to new security offerings.
Common Stock: New common equity will be raised only by retaining earnings.
Preferred stock: New preferred stock could be sold to the public at a price of Br.100 per share, with a dividend of Br.10, and floatation costs of Br.5 would be incurred.
Debt (bond): Debt could be sold at an interest rate of 10%.
Required:
Problem i) Find the component costs of debt, preferred stock and common stock
Problem ii) Determine the Weighted average cost of capital (WACC) of the company.
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