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Northman's common equity, debt, and preferred equity are worth $70,000, $10,000 and $20,000 respectively with a total value is $100,000.
Northman’s common equity, debt, and preferred equity are worth $70,000, $10,000 and $20,000 respectively with a total value is $100,000. The company’s common stock is currently listed at $54 per share; new preferred stock sells for $70 per share with a flotation cost of 10% and pays a dividend of $3.5 per share. Last year the company paid dividends of $2 per share on common stock, which is expected to grow at a constant rate of 5%. The local bank is willing to finance the project at 12% annual interest. Assuming the company’s tax rate is 35%, do the following computations:
- What is the after-tax cost of debt?
- What is the cost of common equity, assuming only retained earnings are used?
- What is the cost of new preferred equity?
- What is the Weighted Average Cost of Capital (WACC)?
