1. HBM has the following capital structure:

Assets: $400,000

Debt: $140,000 PFD stock $20,000 Common Stock: $240,000

The common stock is currently trading at $15.00 per share, pays a cash dividend of .75 cents per share and is growing annually at 6%. The PFD stock pays a $9.00 dividend and currently trades at $91.00 per share. The debt pays interest of 8.5% annually and the firm is in the 30% tax bracket.

a. What is the after tax cost of debt?

b. What is the cost of preferred stock?

c. What is the cost of common stock?

d. What is the WACC?



2. Sun Instruments expects to issue new stock at $34.00 per share with estimated float costs of 7% of market price. The company currently pays a $2.10 cash dividend and has a 6% growth rate. What are the costs of retained earnings and new common stock?



3. Assume the following capital structure for XYZ Company:



Debt 35%

PFD 15%

Common 50%









The following facts are also provided:

Bond yield to maturity 9%

Corporate tax rate 35%

Dividend on PFD stock $8.50

Price of PFD stock $100

Float cost on PFD stock $2.00

Dividend on common stock $1.20

Price of common stock $30.00

Growth rate, common stock 9%

a. Compute the WACC.

b. IF there is $30 million in retained earnings, at what dollar value will the marginal cost of capital go up? If the float cost on common stock is $1.50, what will be the cost of new common stock?

CLUE: the marginal cost of capital will go up when there is no longer enough