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Expansion Funds in the form of Equity: WACC

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A company has 1,000,000 shares of common stock with a market price of $35 per share, 225,000 shares of preferred stock with a market price of $98 per share, and 10,000 bonds outstanding which are selling in the market at 97.25 percent of par. The company needs new capital of $12 million to expand its asset base. It has calculated that the after-tax cost of new equity is 12.50% and the cost of new preferred stock is 9.4%. The company's bonds are yielding 8% in the market. Corporate tax rate is 34%.

What percent of the new expansion funds must be in the form of equity and what is the weighted average cost of capital?

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Solution Preview

The percentage needed in the form of equity will depend on the market value capital structure. We first calculate the market value of the capital components

Market value of common stock = 1,000,000 X 35 = 35,000,000
Market value of ...

Solution Summary

In this solution, we show how to calculate the percent of the new expansion funds that must be in the form of equity, and the weighted average cost of capital (WACC).

$2.19