During the last few years, Helney Industries has been too constrained by the high cost of capital to make many capital investments. Recently, though, capital costs have been declining, and the company has decided to look seriously at a major expansion program proposed by the marketing department. Assume that you are an assistant to Leigh Jones, the financial vice president. Your first task is to estimate Helney’s cost of capital. Jones has provided you with the following data, which she believes may be relevant to your task: (1) The f
During the last few years, Helney Industries has been too constrained by the high cost of capital to make many capital investments. Recently, though, capital costs have been declining, and the company has decided to look seriously at a major expansion program proposed by the marketing department. Assume that you are an assistant to Leigh Jones, the financial vice president. Your first task is to estimate Helney’s cost of capital. Jones has provided you with the following data, which she believes may be relevant to your task:
(1) The firm’s tax rate is 40%.
(2) The current price of Harry Davis’s 12% coupon, semi-annual payment, noncallable bonds with 15 years remaining to maturity is $1,225.72. Helney does not use short-term interest-bearing debt on a permanent basis.
(3) The current price of the firm’s 10%, $100 par value, quarterly dividend, perpetual preferred stock is $117.
(4) Helney’s common stock is currently selling at $50 per share. Its last dividend (D0) was $3.12, and dividends are expected to grow at a constant rate of 5.8% in the foreseeable future
Helney’s target capital structure is 25% long-term debt, 15% preferred stock, and 60% common equity.
Required:
Calculate WACC.
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