What is the firms cost of a new issue of common stock

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Reference no: EM13336110

A firm has determined its optimal capital structure which is composed of the following sources and target market value proportions.

Debt: The firm can sell a 15-year, $1,000 par value, 8 percent semi-annual bond for $960. A flotation cost of 2 percent of the face value would also be required , but was not factored into the market price listed above. Preferred Stock: The firm has determined it can issue preferred stock at $25 per share par value. The stock will pay a $2.25 annual dividend. The cost of issuing and selling the stock is $2 per share.
Common Stock: A firm's common stock is currently selling for $34 per share. The dividend expected to be paid at the end of this year is $2.74. Its dividend payments have been growing at a constant rate of 4% for the last four years. It is expected any new common stock issue would be subject to $1 per share in floatation costs.
Additionally, the firm's marginal tax rate is 35 percent.

The firm is considering a project with the following cash flows:
initial cost year 1 year 2 year 3
$5,000,000 $1,000,000 $2,000,000 $3,300,000

a) The firm's before-tax cost of newly-issued debt is?

b) The firm's after-tax cost of debt is?

c) The firm's cost of new preferred stock is?

d) The firm's cost of retained earnings is ?

e) The firm's cost of a new issue of common stock is ?

f) What is the firm's WACC if all new components had to be issued?

g) Given the WACC that you calculated in the previous answer, would you accept the project that is under consideration and why?

Reference no: EM13336110

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