Tec Company wants to calculate the computer costs in its capital structure. Comm

Question

Tec Company wants to calculate the computer costs in its capital structure. Common stock currently sells for dollar 30 and is expected to pay a dividend of dollar.90. Tec's dividend growth rate is 9 percentage and the flotation cost is 10 percentage. Preferred stock for percentage, pays a dividend of dollar 10, and carries a flotation cost of dollar 5. Tec Company bonds yield 9 percentage in the market. Tec is the 40 percentage tax bracket. Calculate cost of debt. Calculate cost of preferred stock. Calculate cost of retained earnings. Calculate cost of new issue of common stock assuming the firm has exhausted all retained earnings. Calculate WACC if company has dollar 20 million debt, dollar 10 preferred stock, and dollar 70 million common equity. Calculate MCC

Explanation / Answer

Answer:A Cost of Debt=9%(1-0.40)=5.4%

Answer:B Cost of Preferred stock=$10/($100-$5)=10.53%

Answer:C Cost of retained earnings=(0.90/$30)+0.09=12%

Answer:D Cost of (new) common stock=(0.90/(30*90%))+0.09=12.33%

Answer:E WACC=(20/100)*5.4%+(10/100)*10.53%+(70/100)*12.33%)=1.08%+1.053%+8.631%

=10.764%

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