Balance Sheet Data Long-Term Debt Preferred Stock Common Equity 30,000,000 20,000,000 20,000,000 Number of shares of Common 1,500,000 Price per share Common $42 Number of shares of Preferred Price per share Preferred $108 Price of 8% 25-year Bonds $1075 150,000 40,000 40,200 $3.30 $100 Number of 8% Coupon 25-year Bonds Number of 6% Coupon 15 year Bonds Forecasted Dividend on Common (D) Par Value of Preferred Price of 6% 15 year Bonds $920 Dividend Rate on Preferred 9.5% Current 10-Year Treasury Yld 4.3% Standard Deviation of Stock 40% Correlation Stock vs. Market 0.50 Market Risk Premium 5.0% Standard Deviation of Market 15% Risk Premium of our Stock over our 15-yr Bonds 3.9% Forecasted Constant Growth 3.0% Tax Rate 25% Flotation costs on Bonds 1.4% Flotation costs on Preferred 2.4% 1. Calculate the appropriate weights to use for the financing sources. (Hint: Assume that the firm feels their current mix of long-term debt is good and would like to raise capital with the same mix of maturities) 2. Calculate the after-tax cost of debt (hint: You can account for the two bonds by taking a weighted average of their cost or by keeping them separate and putting both into the WACC formula at their individual weights). Note that there are flotation costs of 1.4% on bonds. 3. Calculate the cost of preferred. Note that there are flotation costs of 2.496 on preferred stock. 4. Calculate the cost of common (Hint: Use all three methods and take an average). Note that all common equity will come from internally generated equity (retained earnings) which means no new shares will be issued and no flotation costs incurred. 5. Calculate the WACC 6. Why are firms likely to prefer internally generated equity to issuing new shares of common? Identify and briefly explain two reasons. 7. If my firm had two separate divisions - one relatively low risk and one relatively high risk, how might I apply the WACC to each division? Balance Sheet Data Long-Term Debt Preferred Stock Common Equity 30,000,000 20,000,000 20,000,000 Number of shares of Common 1,500,000 Price per share Common $42 Number of shares of Preferred Price per share Preferred $108 Price of 8% 25-year Bonds $1075 150,000 40,000 40,200 $3.30 $100 Number of 8% Coupon 25-year Bonds Number of 6% Coupon 15 year Bonds Forecasted Dividend on Common (D) Par Value of Preferred Price of 6% 15 year Bonds $920 Dividend Rate on Preferred 9.5% Current 10-Year Treasury Yld 4.3% Standard Deviation of Stock 40% Correlation Stock vs. Market 0.50 Market Risk Premium 5.0% Standard Deviation of Market 15% Risk Premium of our Stock over our 15-yr Bonds 3.9% Forecasted Constant Growth 3.0% Tax Rate 25% Flotation costs on Bonds 1.4% Flotation costs on Preferred 2.4% 1. Calculate the appropriate weights to use for the financing sources. (Hint: Assume that the firm feels their current mix of long-term debt is good and would like to raise capital with the same mix of maturities) 2. Calculate the after-tax cost of debt (hint: You can account for the two bonds by taking a weighted average of their cost or by keeping them separate and putting both into the WACC formula at their individual weights). Note that there are flotation costs of 1.4% on bonds. 3. Calculate the cost of preferred. Note that there are flotation costs of 2.496 on preferred stock. 4. Calculate the cost of common (Hint: Use all three methods and take an average). Note that all common equity will come from internally generated equity (retained earnings) which means no new shares will be issued and no flotation costs incurred. 5. Calculate the WACC 6. Why are firms likely to prefer internally generated equity to issuing new shares of common? Identify and briefly explain two reasons. 7. If my firm had two separate divisions - one relatively low risk and one relatively high risk, how might I apply the WACC to each division