Company can't lower its total cost of the $100 million of debt very much if any by the mix of debentures or mortgage bonds.
2) Debentures' risk rises as mortgage debt rises.
3) Mortgage bonds' risk rises as more mortgage bonds are issued.
4) So,the "WACD" will likely remain fairly stable.
25) Bouchard Company's stock sells for $20 per share,its last dividend (D₀) was $1.00,its growth rate is a constant 6 percent,and the company would incur a flotation cost of 20 percent if it sold new common stock.Retained earnings for the coming year are expected to be $1,000,000,and the common equity ratio is 60 percent.If Bouchard has a capital budget of $2,000,000,what component cost of common equity will be built into the WACC for the last dollar of capital the company raises?

Question

Quizplus · Accepted Answer

The component cost of common equity for the last dollar of capital Bouchard Company raises can be calculated using the dividend discount model (DDM) adjusted for flotation costs. The formula for the cost of new equity (re) is re = (D1 / P0(1 - F)) + g, where D1 is the dividend next year, P0 is the current stock price, F is the flotation cost as a decimal, and g is the growth rate. Here, D1 = $1.00 * (1 + 0.06) = $1.06, P0 = $20, F = 0.20, and g = 0.06. Plugging these values into the formula gives re = ($1.06 / $20 * (1 - 0.20)) + 0.06 = ($1.06 / $16) + 0.06 = 0.12625 or 12.63%.

Company Can't Lower Its Total Cost of the $100 Million