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Finance: Weighted average cost of capital

ADB Corporation is considering building a new facility in Texas. To raise money for the capital projects,
the corporation plans the following capital structure: 30% of money will come from issuing bonds,
and 70% will come from Retained Earnings or new common stock.

The corporation does not currently have preferred stock. ADB Corporation will issue bonds with an interest rate of 8%
up to $30 million dollars in bonds. After issuing $30 million in bonds, the interest cost will rise to 12.5%.

The next dividend on common stock is expected to be $2.00 per share. The stock price is $25.00 per share, and is expected
to grow at 3% per year. The flotation cost for issuing new common stock is estimated at 10%.

ADB Corporation has $66 million in retained earnings that can be used.

The tax rate for ADB Corporation is 35%.

1. What is the initial weighed average cost of capital (WACC) for ADB Corporation?

2. There are two breakpoints in ADB's capital structure. At what point does the first breakpoint occur?

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QUESTION

ADB Corporation is considering building a new facility in Texas. To raise money for the capital projects,
the corporation plans the following capital structure: 30% of money will come from issuing bonds,
and 70% will come from Retained Earnings or new common stock. The corporation does not currently have preferred stock. ADB Corporation will issue bonds with an interest rate of 8% up ...

Solution Summary

The problem deals with determining the cost of capital with provided information.

$2.19