The Imaginary Products Co. currently has debt with a market value of $300 million
outstanding. The debt consists of 9 percent coupon bonds (semiannual coupon payments)
which have a maturity of 15 years and are currently priced at $1,440.03 per bond. The firm
also has an issue of 2 million preferred shares outstanding with a market price of $12.00 per
share. The preferred shares pay an annual dividend of $1.20. Imaginary also has 14 million
shares of common stock outstanding with a price of $20.00 per share. The firm is expected
to pay a $2.20 common dividend one year from today, and that dividend is expected to
increase by 5 percent per year forever.
If Imaginary is subject to a 40 percent marginal tax rate, then what is the firm's weighted
average cost of capital?
outstanding. The debt consists of 9 percent coupon bonds (semiannual coupon payments)
which have a maturity of 15 years and are currently priced at $1,440.03 per bond. The firm
also has an issue of 2 million preferred shares outstanding with a market price of $12.00 per
share. The preferred shares pay an annual dividend of $1.20. Imaginary also has 14 million
shares of common stock outstanding with a price of $20.00 per share. The firm is expected
to pay a $2.20 common dividend one year from today, and that dividend is expected to
increase by 5 percent per year forever.
If Imaginary is subject to a 40 percent marginal tax rate, then what is the firm's weighted
average cost of capital?