The target capital structure for Millennium Corporation is 50 percent common stock, 5 percent preferred stock, and 45 percent debt. Its cost of equity is 15 percent, the cost of preferred stock is 6 percent, and the cost of debt is 8 percent. The relevant tax rate is 35 percent. a) What is Millennium’s WACC? b) The company president has approached you about its capital structure. He wants to know why the company doesn’t use more preferred stock financing because it costs less than debt. What would you tell the president?

The target capital structure for Millennium Corporation is 50 percent common stock, 5 percent preferred stock, and 45 percent debt. Its cost of equity is 15 percent, the cost of preferred stock is 6 percent, and the cost of debt is 8 percent. The relevant tax rate is 35 percent. a) What is Millennium’s WACC? b) The company president has approached you about its capital structure. He wants to know why the company doesn’t use more preferred stock financing because it costs less than debt. What would you tell the president?

EBK CFIN

6th Edition

ISBN:9781337671743

Author:BESLEY

Publisher:BESLEY

Chapter11: The Cost Of Capital

Section: Chapter Questions

Problem 15PROB

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