1.NCC Corporation is considering building a new facility in
Texas. To raise money for the capital projects, the corporation
plans the following capital structure: 40% of money will come from
issuing bonds, and 60% will come from Retained Earnings or new
common stock. The corporation does not currently have preferred
stock. NCC Corporation will issue bonds with an interest rate of
9%, up to $30 million dollars in bonds. After issuing $30 million
in bonds, the interest cost will rise to 12.5%. The next dividend
on common stock is expected to be $2.00 per share. The stock price
is $16.00 per share, and is expected to grow at 3% per year. The
flotation cost for issuing new common stock is estimated at 12%.
NCC Corporation has $66 million in retained earnings that can be
used. The tax rate for NCC Corporation is 35%.
A.What is the initial weighted average cost of capital (WACC) for NCC Corporation?
B.There are two breakpoints in NCC's capital structure. At what point does the first breakpoint occur?
C.At what point does the second breakpoint occur?
D.What is the weighted average cost of capital after the first breakpoint?
E.What is the WACC after the second breakpoint?
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