Weighted Average Cost Of Capital Puppet Masters Is Considering A New Capital Investment

Question

Weighted Average Cost of Capital:

Puppet Masters is considering a new capital investment

project. The company has an optimal capital structure and plans to maintain it. The yield to maturity on Puppet Masters’ debt is 10 percent, and its interest subsidy tax rate is 20 percent. The market price of the new issue of preferred stock is $25 per share, with an expected per share dividend of $2 at the end of this year. Flotation costs are set at $1 per share. The new issue of common stock has a current market price of $140 per share, with an expected dividend in one year of $5. Flotation costs for issuing new common stock are $4 per share. Puppet Masters’ dividends are growing at 10 percent per year, and this growth is expected to continue for the foreseeable future. Selected figures from last year’s balance sheet follow:

Total Assets

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