Math Problem Statement
The Expanding Capital Corporation has a current capital structure of $15 million in secured bonds paying 6.5% annual interest, $10 million in preferred stock with a par value of $50 per share and an annual dividend of $3.80 per share, and common stock with a book value of $75 million. It is about to issue new debentures in the amount of $10 million paying 7.5% annual interest. Its CFO says its marginal tax rate is 30% and its cost of common equity capital is 12%. Calculate the company’s Weighted Average Costs of Capital for the following:
Before the new bond issue After the new bond issue
Solution
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Math Problem Analysis
Mathematical Concepts
Cost of Capital
Weighted Average Cost of Capital (WACC)
Capital Structure
Formulas
Cost of Debt (after-tax)
Cost of Preferred Stock
Cost of Equity
Theorems
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Suitable Grade Level
Professional
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