Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)
15th Edition
ISBN: 9780134476315
Author: Chad J. Zutter, Scott B. Smart
Publisher: PEARSON
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Chapter 9, Problem 9.1STP
Learning Goals 3, 4, 5, 6
ST9-1 Individual financing costs and WACC Humble Manufacturing is interested in measuring its overall cost of capital. The firm is in the 40% tax bracket. The company’s financial analysts have gathered the following data:
Debt The firm can raise debt by selling $1 ,000-par-value, 10% coupon interest rate, 10-year bonds on which annual interest payments will be made. When these bonds are issued, their market price will be $970. The firm must also pay flotation costs of $20 per bond.
Common stock The firm’s common stock is currently selling for $80 per share. The firm expects to pay cash dividends of $6 per share next year. The firm's dividends have been growing at an annual rate of 6%, and this growth will continue in the future. The stock will have to be underpriced by $4 per share, and flotation costs amount to $4 per share.
- a. Calculate the individual cost of each source of financing. (Round to the nearest 0.1 %.)
- b. Calculate the firm’s weighted average cost of capital (WACC) using the weights shown in the following table, which are based on the firm's target capital structure proportions. (Round to the nearest 0.1%.)
| Source of capital | Weight |
| Long-term debt | 40% |
| Preferred stock | 15 |
| Common stock equity | 45 |
| Total | 100% |
- c. In which, if any, of the investments shown in the following table do you recommend that the firm invest? Explain your answer. How much new financing is required?
| Investment opportunity | Expected |
Initial investment | |
| A | 11.2% | $100,000 | |
| B | 9.7 | 500,000 | |
| C | 12.9 | 150,000 | |
| D | 16.5 | 200,000 | |
| E | 11.8 | 450,000 | |
| F | 10.1 | 600,000 | |
| G | 10.5 | 300,000 |
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Chapter 9 Solutions
Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)
Ch. 9.1 - What is the cost of capital?Ch. 9.1 - Prob. 9.2RQCh. 9.1 - Prob. 9.3RQCh. 9.1 - What are the typical sources of long-term capital...Ch. 9.2 - Prob. 9.5RQCh. 9.2 - Prob. 9.6RQCh. 9.2 - Prob. 9.7RQCh. 9.3 - How would you calculate the cost of preferred...Ch. 9.4 - What premise about share value underlies the...Ch. 9.4 - How do the constant-growth valuation model and...
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