Honda Inc. (HI) has the following capital structure, which it considers to be optimal: debt = 25%,
bonds yield 6%, the market risk premium is 5%, and Honda Inc.’s beta is 1.3. The following terms would apply to new security offerings.
Preferred: New preferred could be sold to the public at a price of $100 per share, with a dividend of $9. Flotation costs of $5 per share would be incurred.
Debt: Debt could be sold at an interest rate of 9%.
Common: New common equity will be raised only by
a. Find the component costs of debt, preferred stock, and common stock.
b. What is the WACC?
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