Finest Products, Inc- WACC
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Finest Products, Inc. has an optimal capital structure of 30% debt, 10% preferred stock, and 60% common equity. The firm has an after-tax cost of debt of 8%, and can sell as much debt as it wants at this rate. The firm's preferred stock is currently selling for $110 per share and pays a $10 dividend. Finest's common stock is selling at $25 per share and has a current annual dividend at $2 per share with an expected dividend growth rate of 5% per year. Flotation costs would amount to 10% for the sale of new preferred stock as well as new common stock. Calculate FPI's WACC above the breakpoint.
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Solution Summary
The solution calculates WACC given optimal capital structure, price and return on securities (debt, common stock and preferred stock) and floatation costs.
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Finest Products, Inc. has an optimal capital structure of 30% debt, 10% preferred stock, and 60% common equity. The firm has an after-tax cost of debt of 8%, and can sell as much debt as it wants at this rate. The firm's preferred stock is currently selling for $110 per share and pays a $10 dividend. Finest's common stock is selling at $25 per share and has a current annual dividend at $2 per share with an expected dividend growth rate of 5% per year. Flotation costs would amount to 10% for the sale of new ...
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