Question

Smith and Sons Inc. has a target capital structure that calls for 40 percent debt, 10 percent preferred stock, and 50 percent common equity. The firm's current after-tax cost of debt is 6 percent, and it can sell as much debt as it wishes at this rate. The firm's cost of preferred stock is 11 percent and its cost of retained earnings is 14 percent. The firm expects to generate $15,000 in retained earnings this year. Compute the weighted average cost of capital (WACC) break point associated with issuing new common stock

Answer 1

Answer: $30,000

Step-by-step explanation:

The weighted average cost of capital (WACC) break point that is associated with the issuing of the new common stock will be:

= Earnings retain / Percent of common equity in capital structure

= $15000 / 50%

= $15000/0.5

= $30,000