Meacham Corp. wants to issue bonds with a 9% semi-annual coupon, a face value of $1,000, and 12 years to maturity. Meacham estimates that the bonds will sell for $1,090. Meacham Corp. common stock currently sells for $30 per share. Meacham can sell additional shares by incurring flotation costs of $3 per share. Meacham paid a dividend yesterday of $4.00 per share and expects the dividend to grow at a constant rate of 5% per year. Meacham also expects to have $12 million of retained earnings available for use in capital budgeting projects during the coming year. Meacham's management team decides to replace all common stock with newly issued ones and form a capital structure with 40% debt and 60% common equity. Meacham's marginal tax rate is 35%. Find out the after-tax cost of debt of Meacham Corp. Assuming Meacham's bonds are its only debt and there's no flotation costs. b. Calculate the cost of retained earnings. а. с. Calculate the cost of new common stock.
Meacham Corp. wants to issue bonds with a 9% semi-annual coupon, a face value of $1,000, and 12 years to maturity. Meacham estimates that the bonds will sell for $1,090. Meacham Corp. common stock currently sells for $30 per share. Meacham can sell additional shares by incurring flotation costs of $3 per share. Meacham paid a dividend yesterday of $4.00 per share and expects the dividend to grow at a constant rate of 5% per year. Meacham also expects to have $12 million of retained earnings available for use in capital budgeting projects during the coming year. Meacham's management team decides to replace all common stock with newly issued ones and form a capital structure with 40% debt and 60% common equity. Meacham's marginal tax rate is 35%. Find out the after-tax cost of debt of Meacham Corp. Assuming Meacham's bonds are its only debt and there's no flotation costs. b. Calculate the cost of retained earnings. а. с. Calculate the cost of new common stock.
Chapter20: Financing With Derivatives
Section: Chapter Questions
Problem 17P
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Transcribed Image Text:Meacham Corp. wants to issue bonds with a 9% semi-annual coupon, a face value of $1,000, and
12 years to maturity. Meacham estimates that the bonds will sell for $1,090. Meacham Corp.
common stock currently sells for $30 per share. Meacham can sell additional shares by incurring
flotation costs of $3 per share. Meacham paid a dividend yesterday of $4.00 per share and expects
the dividend to grow at a constant rate of 5% per year. Meacham also expects to have $12 million
of retained earnings available for use in capital budgeting projects during the coming year.
Meacham's management team decides to replace all common stock with newly issued ones and
form a capital structure with 40% debt and 60% common equity. Meacham's marginal tax rate is
35%.
Find out the after-tax cost of debt of Meacham Corp. Assuming Meacham's bonds are its
а.
only debt and there's no flotation costs.
b. Calculate the cost of retained earnings.
с.
Calculate the cost of new common stock.
d. Calculate the weighted average cost of capital assuming Meacham's total capital budget is
$30 million.
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