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    The capital structure for Nealon, Inc.

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    The capital structure for Nealon, Inc., follows:

    Nealon, Inc., Balance Sheet

    TYPE OF FINANCING PERCENTAGE OF FUTURE FINANCING
    Bonds (8%, $1,000 par, 16-year maturity)
    38%

    Preferred stock (5,000 shares outstanding, $50 par, $1.50 dividend)
    15%

    Common stock
    47%

    Total
    100%

    Flotation costs are (a) 15 percent of market value for a new bond issue, (b) $1.21 per share for common stock, and (c) $2.01 per share for preferred stock. The dividends for common stock were $2.50 last year and are projected to have an annual growth rate of 6 percent. The firm is in a 34 percent tax bracket. What is the weighted average cost of capital if the firm finances are in the following proportions?

    Market prices are $1,035 for bonds,$19 for preferred stock, and $35 for common stock. There will be sufficient internal common equity funding (i.e., retained earnings) available such that the firm does not plan to issue new common stocks.

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    Solution Preview

    Weighted average cost of capital
    The capital structure for Nealon, Inc., follows:

    Nealon, Inc., Balance Sheet

    TYPE OF FINANCING PERCENTAGE OF FUTURE FINANCING
    Bonds (8%, $1,000 par, 16-year maturity)
    38%

    Preferred stock (5,000 shares outstanding, $50 par, $1.50 dividend)
    15%

    Common stock
    47%

    Total
    100%

    Flotation costs are (a) 15 percent of market value for a new bond issue, (b) $1.21 per share for common stock, and (c) $2.01 per share for preferred stock. The dividends for common stock were $2.50 last year and are projected to have an annual growth rate of 6 percent. The firm is in a 34 percent tax bracket. What is the weighted average cost of capital if the firm finances are in the following proportions?

    Market prices are $1,035 for bonds,$19 for preferred stock, and $35 for common stock. There will be ...

    Solution Summary

    This solution is comprised of a detailed explanation to find the weighted average cost of capital for Nealon, Inc.

    $2.49

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