Bonds - The G Company has 10,000 bonds outstanding. The bonds are selling at 101 percent of face value, have a 7 percent coupon rate, pay interest yearly, & mature in 9 years.
Preferred shares - There are 500,000 shares of 8 percent preferred stock [$100 stated value] outstanding with a current market price of $91 a share.
Common shares - In addition, there are 1.25 million shares of common stock outstanding with a market price of $63 a share and a beta of .97. The common stock paid a total of $1.20 in dividends last year and expects to raise those dividends by 3% yearly.
Other - The firm's marginal tax rate is 35 percent. The overall stock market is yielding 11% & the Treasury bill rate is 3.5 percent.
[A] find out the cost of financing using preferred stock?
[B] find out cost of equity based on the dividend growth model? find out the cost of equity based on the security market line? Which is more reasonable?
[C] find out the after tax cost of debt financing?
[D] find out the WACC of the Gitman Company?
[E] Suppose the above capital structure is considered optimal; next year's expected income is $10,000,000, and no change in dividend policy. Determine the amount of projects could the firm finance before needing to issue new common shares? i.e. find out the common equity breakpoint?
[D] Suppose a 5 percent flotation cost for each financing source, determine the marginal cost of capital (MCC) for financing above the breakpoint you determined in part e?