Meacham Corp. wants to issue bonds with a 9% semi-annual coupon, a face value of $1,000, and 12 years to maturity. Meacham estimates that the bonds will sell for $1,090. Meacham Corp. common stock currently sells for $30 per share. Meacham can sell additional shares by incurring flotation costs of $3 per share. Meacham paid a dividend yesterday of $4.00 per share and expects the dividend to grow at a constant rate of 5% per year. Meacham also expects to have $12 million of retained earnings available for use in capital budgeting projects during the coming year. Meacham's management team decides to replace all common stock with newly issued ones and form a capital structure with 40% debt and 60% common equity. Meacham’s marginal tax rate is 35%.
Meacham Corp. wants to issue bonds with a 9% semi-annual coupon, a face value of $1,000, and 12 years to maturity. Meacham estimates that the bonds will sell for $1,090. Meacham Corp. common stock currently sells for $30 per share. Meacham can sell additional shares by incurring flotation costs of $3 per share. Meacham paid a dividend yesterday of $4.00 per share and expects the dividend to grow at a constant rate of 5% per year. Meacham also expects to have $12 million of retained earnings available for use in capital budgeting projects during the coming year. Meacham's management team decides to replace all common stock with newly issued ones and form a capital structure with 40% debt and 60% common equity. Meacham’s marginal tax rate is 35%.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Calculate the weighted average cost of capital assuming Meacham's total capital budget is
$30 million.
Transcribed Image Text:Meacham Corp. wants to issue bonds with a 9% semi-annual coupon, a face value of $1,000, and
12 years to maturity. Meacham estimates that the bonds will sell for $1,090. Meacham Corp.
common stock currently sells for $30 per share. Meacham can sell additional shares by incurring
flotation costs of $3 per share. Meacham paid a dividend yesterday of $4.00 per share and expects
the dividend to grow at a constant rate of 5% per year. Meacham also expects to have $12 million
of retained earnings available for use in capital budgeting projects during the coming year.
Meacham's management team decides to replace all common stock with newly issued ones and
form a capital structure with 40% debt and 60% common equity. Meacham's marginal tax rate is
35%.
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