Samuel Company is a retail grocery store chain of moderate size. The company was incorporated 15 years ago with a public offering of its stock. At that time, the company operated primarily in the Northeast. Five years ago the company acquired a small chain of grocery stores in the Southeast. The acquisition was financed by the private placement of a 20-year bond issue that originally sold with a market yield of 10%.
In the last 3 years, a primary competitor remodeled its stores and increased its market share substantially. Management is considering a large-scale remodeling of every store to meet the competitive pressure. The following three financing alternatives have been proposed to provide the necessary funds for expansion.
(a) Pure debt financing alternative. This alternative consists of a public issue of bonds with a face value of $ 10,000,000. The bonds would have a 12% coupon rate and would net $10,000,000 after issue costs.
(b) Debt and preferred stock financing alternative. This alternative consists of (1) issuing bonds with a face value of $5,000,000 and a 12% coupon rate (to net $5,000,000 after issue costs), and (2) issuing preferred stock with a stated rate of 9% (to yield $5,000,000 after a 4% issue cost is deducted).
(c) Common stock financing alternative. This alternative consists of a public issue of common stock that would yield $10,000,000 after a 5% issue cost is deducted.
The current market value of the company's common stock is $20 per share. The after tax earnings for common stock for the preceding year was $2.10 per share. Earnings for the current year are expected to be about the same. The company's present capital structure consists of $20,000,000 in long-term debt (which has an effective market yield rate of 10%), $10,000,000 in 9% preferred stock, and $45,000,000 in common stock equity (3,000,000 shares outstanding). The company is subject to a 40% effective income tax rate.
Required:
(1) Determine the company's marginal after-tax weighted-average cost of capital for each of the three financing alternatives. Round your answer to the nearest tenth of a percent.
(2) Determine the company's weighted-average cost of capital based on the current financing mix (that is, without considering additional financing needed for the proposed capital expenditure). Round your answer to the nearest tenth of a percent.
(3) Determine the company's overall after-tax weighted-average cost of capital (current plus additional financing required for the proposed capital expenditure) for each of the three financing alternatives. Round your answer to the nearest tenth of a percent.