CompU has a target capital structure of 30 percent debt and 70 percent equity. It has $280,000 in retained earnings. CompU’s investment banking firm has advised them that they can issue $300,000 of secured debt. The $300,000 issue will consist of 10-year, $1,000 par value bonds that pay 9% and can be sold for $938.55. Flotation costs for debt is negligible and can be ignored. Flotation costs for new common stock are $1 per share; the expected stock price is $7.00. The last dividend paid was $0.80 and they expect the dividends to grow at a constant growth rate of 6% into the foreseeable future. CompU’s marginal tax rate is 40%.
a. What is the after-tax cost of debt?
b. What is the cost of retained earnings?
c. What is the cost of new common stock?
d. What is the weighted average cost of capital using retained earnings?
e. What is the weighted average cost of capital using new common stock?

  • CreatedSeptember 19, 2013
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