Xavier Manufacturing Company has determined its optimal capital structure, which is composed of the following sources and target market value proportions: Target Market - Source of Capital Proportions Long-term debt 35% Preferred stock 5% Common stock equity 60% Debt: The firm plans to issue a 20-year, $1,000 par value, 6%(percent) bond. A flotation cost of 3% (percent) of the face value would be required. Preferred Stock: The firm has determined it can issue preferred stock at $70 per share par value. The stock will pay an $8.00 annual dividend. The cost of issuing and selling the preferred stock will be $3 per share. Common Stock: The firm’s common stock is currently selling for $40 per share. The dividend expected to be paid at the end of the coming year is $5.00. Its dividend payments have been growing at a constant rate for the last five years at a rate of 5%. In order to assure that the new stock issuance will sell, the common stock must be underpriced by $2 per share. In addition, the firm must pay an addition $1 per share in flotation costs. The firm’s tax rate is 40 percent. Required: Calculate the firm’ weighted average cost of capital for the Xavier Company assuming the firm has exhausted all retained earnings. (That is, you must consider flotation costs for the common stock issuance.)
Xavier Manufacturing Company has determined its optimal capital structure, which is composed of the following sources and target market value proportions:
Target Market - Source of Capital Proportions
Long-term debt 35%
Common stock equity 60%
Debt: The firm plans to issue a 20-year, $1,000 par
Preferred Stock: The firm has determined it can issue preferred stock at $70 per share par value. The stock will pay an $8.00 annual dividend. The cost of issuing and selling the preferred stock will be $3 per share.
Common Stock: The firm’s common stock is currently selling for $40 per share. The dividend expected to be paid at the end of the coming year is $5.00. Its dividend payments have been growing at a constant rate for the last five years at a rate of 5%.
In order to assure that the new stock issuance will sell, the common stock must be underpriced by $2 per share. In addition, the firm must pay an addition $1 per share in flotation costs.
The firm’s tax rate is 40 percent.
Required:
Calculate the firm’ weighted average cost of capital for the Xavier Company assuming the firm has exhausted all
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