Reference no: EM132634480

To supply the demand in the market, 3D will have to expand its facilities. Of the required expansion, 3D feels it can raise P75 million internally, through retained earnings. The firm's optimum capital structure has been 35% debt, 10% preferred stock and 55% equity. The company will try to maintain this capital structure in financing this expansion plan. Currently, 3D's common stock is traded at a price of P28 per share. Last year's dividend was P1.50 per share. The growth rate is 8%. The company's preferred stock is selling at P45 and has been yielding 6% in the current market. Flotation costs have been estimated at 8% of common stock and 3% of preferred stock. 3D Corp. has bonds outstanding at 6%, but its investment banker has informed the company that interest rates for bonds of equal risk are currently yielding 5%. Tax rate is 40%.

Question a. Compute the WACC

Question b. Calculate the initial weighted average cost of capital using re .only.

Question c. How large a capital budget can the firm support with retained earnings financing?