A firm that is in the 35% tax bracket forecasts that it can retain $3 million…

A firm that is in the 35% tax bracket forecasts that it can
retain $3 million of new earnings plans to raise new capital in the
following proportions:

50% from 20-year bonds with a
flotation cost of 5% of face value. Their current bonds are selling
at a price of 92 (92% of face value), have 5 years remaining, have
an annual coupon of 7.2%, and their investment bank thinks that new
bonds will have a 50 basis point (0.50%) higher yield-to-maturity
than their current 5 year bonds due to their longer term.

10% from preferred stock with
a flotation cost of 6% of face value. The firm currently has an
outstanding issue of $50 face value fixed-rate preferred stock with
an annual dividend of $3 per share, and the stock is currently
selling at $36 per share. Any newly issued preferred stock will
continue with the $50 par-value, and will continue the $3
dividend.

40% from equity. Their common
dividend payout ratio is 60%, they recently paid a dividend of
$1.60 per share, the dividend is expected to grow to $3.50 in 10
years, and is expected to continue this growth rate into the
foreseeable future. The common stock has a current market price of
$19, and their investment banker suggests a flotation cost of 6% of
market value on new common equity.

The after-tax cost of the new bond financing is 7.2%
The after-tax cost of the new preferred stock financing is
9.09%
The after-tax cost of retained earnings financing is 17.25%
The after-tax cost of the new common equity financing is
17.83%
The company’s WACC using retained earnings as the source of
equity is 11.41%
The break point in the cost of capital schedule due to running
out of retained earnings is $7.5 million
Part 7: Calculate the company’s WACC after it substitutes the
new common stock issue for retained earnings after it runs out of
retained earnings. _________
Part 8: (Optional) Draw the cost of capital schedule for the
firm. This schedule does not need to be elaborate.