The capital structure weights of Nova Corporation are as follows:
The tax rate of the firm is currently 40%. The needed financial information and data are as follows:
Debt : Nova can raise debt by selling $1,000-par-value, 6.5% coupon interest rate, 10-year bonds on which annual interest payments will be made. To sell the issue, an average discount of $20 per bond needs to be given. There is an associated flotation cost of 2% of par value.
Common stock : The current price of Nova’s common stock is $35 per share. The cash dividend is expected to be $3.25 per share next year. The firm’s dividends have grown at an annual rate of 5%, and it is expected that the dividend will continue at this rate for the foreseeable future. The flotation costs are expected to be approximately $2 per share. Nova can sell new common stock under these terms.
- Calculate the cost of new common stock.
- Calculate the firm’s weighted average cost of capital using retained earnings and the capital structure weights shown in the table above.
- Calculate the firm’s weighted average cost of capital using new common stock and the capital structure weights shown in the table above.
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