WEIGHTED AVERAGE COST OF CAPITAL P&G Peafiel and Godoy have an optimal capital structure that consists

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WEIGHTED AVERAGE COST OF CAPITAL – P&G Peñafiel and Godoy have an optimal capital structure that consists of 60% debt and 40% common equity. They expect to have $20,000,000 of new retained earnings available for investment for the next year.

BONDS. Their investment bankers assure them that they could issue $9,000,000 (net of flotation costs) of $1000 face value bonds carrying a 8% coupon rate, paying annual interest, having a 10-year maturity, at a price of $900. Flotation costs for this issue would be $50 per bond. Bonds issued beyond $9,000,000 will have a flotation cost of $100 per bond, a price of $900, an 8% coupon rate, and a 10-year maturity.

COMMON STOCK. The current stock price is $50. The dividend paid yesterday was $7 per share. Dividends are expected to grow at a rate of 6%, forever. New shares of stock can be issued at $50 per share and flotation costs would be $4 per share.

Peñafiel and Godoy have a corporate tax rate of 30%.

SKETCH THE MARGINAL COST OF CAPITAL SCHEDULE – LABEL ALL POINTS