(a) Almond Corporation is expected to pay a $2.50 dividend at year end (D1 = $2.50), the dividend is expected to grow at a constant rate of 5.50% a year, and the common stock currently sells for $67.50 a share. The before-tax cost of debt is 7.50%, and the tax rate is 40%. The target capital structure consists of 45% debt and 55% common equity. What is the company's  weighted average cost of capital (WACC) if all the equity used is from retained earnings?

 (b) A firm has determined its optimal capital structure which is composed of the following sources. 

Preferred Stock:

The firm has determined it can issue preferred stock at $75 per share par value. The stock will pay a $10 annual dividend. The cost of issuing and selling the stock is $3 per share.

Common Stock:

The firm's common stock is currently selling for $18 per share. The dividend expected to be paid at the end of the coming year is $1.74. Its dividend payments have been growing at a constant rate of 3% for the last four years. It is expected that to sell, a new common stock issue must be underpriced, with floatation costs of $1 per share. 

Based on the above information, what is the firm's cost of preferred stock and cost of a new issue of common stock? Which of the two sources offers a lower cost? Show your workings

Answer rating: 100% (QA)

a To calculate the weighted average cost of capital WACC for Almond Corporation we can use the formu... View the full answer