Barton Industries expects that its target capital structure for raising funds in

Question

Barton Industries expects that its target capital structure for raising funds in the future for its capital budget will consist of 40% debt, 5% preferred stock, and 55% common equity. Note that the firm's marginal tax rate is 40%. Assume that the firm's cost of debt, rd, is 6.9%, the firm's cost of preferred stock, rp, is 6.4% and the firm's cost of equity is 10.9% for old equity, rs, and 11.44% for new equity, re. What is the firm's weighted average cost of capital (WACC1) if it uses retained earnings as its source of common equity? Round your answer to 3 decimal places. Do not round Intermediate calculations. ?????%

What is the firm’s weighted average cost of capital (WACC2) if it has to issue new common stock? Round your answer to 3 decimal places. Do not round Intermediate calculations. ???? %

Explanation / Answer

Barton Industries All Numbers in % ages i. If retained earnings used as a source of common equity Nature of Funding Structure Cost of Post Tax Weighted in Budget Capital Cost Cost Debt 40% 6.90% 4.1400% 1.65600% Preferred Stock 5% 6.40% 6.40% 0.32000% Common Equity 55% 10.90% 10.90% 5.99500% WACC under old structure 7.97100% ii. If new common stock is issued Nature of Funding Structure Cost of Post Tax Weighted in Budget Capital Cost Cost Debt 40% 6.90% 4.1400% 1.65600% Preferred Stock 5% 6.40% 6.40% 0.32000% Common Equity 55% 11.44% 11.44% 6.29200% WACC under new structure 8.26800%

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