Meacham Corp. wants to issue bonds which can be sold at a market price
Question: Meacham Corp. wants to issue bonds which can be so…
Meacham Corp. wants to issue bonds which can be sold at a market price of $540.27 for each bond. The bond will have 8 years maturity period. Meacham Corp. common stock currently sells for $30 per share. Meacham can sell additional shares by incurring flotation costs of $3 per share. Meacham paid a dividend yesterday of $4.00 per share and expects the dividend to grow at a constant rate of 5% per year. Meacham also expects to have $12 million of retained earnings available for use in capital budgeting projects during the coming year. Meacham’s capital structure is 40% debt and 60% common equity. Meacham’s marginal tax rate is 35%.
- Calculate the cost of debt before tax and after-tax cost of debt assuming Meacham’s bonds are its only debt.
- Calculate the cost of retained earnings.
- Calculate the cost of new common stock.
- Calculate the weighted average cost of capital assuming Meacham’s total capital budget is $30 million
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