Question

1. (Cost of Debt) CougarCo has the option to issue 15-year bonds at $1,300 flotation cost of 7% and a coupon rate of 6% (paid annually) with a face value of $1,000. What is CougarCo firm’s cost of debt prior to tax?

2. (Cost of Preferred Stock) The preferred stock of CougarCo will sell for $43.37 and pay a $3.75 dividend. The net price of the security after flotation costs will be $39.28. What is the cost of capital for the preferred stock?

3. (Cost of Equity) CougarCo can issue common stock at a price of $67.75. The floating cost is 17% and the firm recently paid a dividend of $2.28 and has a projected growth rate of 5%. What is CougarCo firm’s cost of equity?

(Weighted Average Cost of Capital) CougarCo is a start-up company. Based on what you calculated on questions 2-4, the company decides to finance itself by issuing 1,000 bonds, 5,000 shares of preferred stock, and 13,000 shares of common stock. Assuming this will represent all of CougarCo’s financing, calculate the firm’s after-tax WACC (assume a tax rate of 34%). Common stock is selling for $56.23

Answer 1