J. Ross and Sons Inc.
J. Ross 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 preferred stock currently sells for $90 a share and pays a dividend of $10 per share; however, the firm will net only $80 per share from the sale of new preferred stock. Ross expects to retain $15,000 in earnings over the next year. Ross' common stock currently sells for $40 per share, but the firm will net only $34 per share from the sale of new common stock. The firm recently paid a dividend of $2 per share on its common stock, and investors expect the dividend to grow indefinitely at a constant rate of 10 percent per year.
-Refer to J.Ross and Sons Inc.What will be the WACC above this break point?
A)12.5%
B)8.3%
C)10.6%
D)11.9%
E)14.1%

Question

Quizplus · Accepted Answer

The WACC above the break point is calculated using the costs of debt, preferred stock, and new common equity, weighted by their target capital structure proportions. The cost of new common equity is calculated using the dividend growth model.