Boylan Metalworks Inc. has the following elements of capital: Debt: Boylan issued $1,000, 30-year bonds 10 years
Question:
Boylan Metalworks Inc. has the following elements of capital:
Debt: Boylan issued $1,000, 30-year bonds 10 years ago at a coupon rate of 9%. Five thousand bonds were sold at par. Similar bonds are now selling to yield 12%.
Preferred Stock: Twenty thousand shares of 10% preferred stock were sold five years ago at their $100 par value. Similar securities now yield 13%.
Equity: The Company was originally financed with the sale of 1,000,000 shares at $10 per share. The stock is now selling at $12.50 per share.
Target Capital Structure:
Debt = 20% Preferred Stock = 10% Equity = 70%
Other Information:
Tax Rate = 40%
Flotation costs on sale of common stock = 10%
The Company is expected to grow at 6.5% indefinitely
The annual dividend paid in the current year was $1.10
Next years’ business plan includes earnings of $1,700,000, of which $1,400,000 will be retained.
- Compute the cost of debt, preferred stock, internal equity (retained earnings), and external equity (new equity)
- Compute the WACC before and after the breakpoint
- Compute the breakpoint