Divided Walls Construction (DWC) has determined the yield to maturity (YTM) on new bonds is 5 percent, its cost of retained earnings is 8 percent, and its cost of new common stock is 11 percent. If DWC’s capital structure consists of 40 percent debt and 60 percent common equity, what is its weighted average cost of capital (WACC) if it does not have to issue new stock to raise additional funds and must issue new stock to raise additional funds? DWC’s marginal tax rate is 35 percent.
Divided Walls Construction (DWC) has determined the yield to maturity (YTM) on new bonds is 5 percent, its cost of retained earnings is 8 percent, and its cost of new common stock is 11 percent. If DWC’s capital structure consists of 40 percent debt and 60 percent common equity, what is its weighted average cost of capital (WACC) if it does not have to issue new stock to raise additional funds and must issue new stock to raise additional funds? DWC’s marginal tax rate is 35 percent.
Chapter12: The Cost Of Capital
Section: Chapter Questions
Problem 17P
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11-17. Divided Walls Construction (DWC) has determined the yield to maturity (YTM) on new bonds is 5 percent, its cost of
- does not have to issue new stock to raise additional funds and
- must issue new stock to raise additional funds?
DWC’s marginal tax rate is 35 percent.
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