Metallic Engineering, Inc., a manufacturer of fabricated aluminum products for aerospace, engineering, automotive, and custom industrial applications, is calculating its WACC. The firm’s common stock just paid a dividend of $1.5 per share and now is selling for $30. The firm’s financial staff estimates the company’s new product will generate an unusual high dividend growth rate of 17% for four years. After this period of time, the dividend growth rate will decline to 3% during a transition period of 3 years, rather than instantaneously. The firm’s debt-to-equity ratio is 3/4 and the flotation costs for new equity will be 7%. Also, the firm has a payout ratio of 60% and 20M of common shares of stock outstanding.
a) Based on the information above, determine the firm’s estimated retained earnings and the associated break-point.
b) Calculate the firm’s cost of retained earnings and the cost of new common equity. Hint: use the required rate of return kCS derived from the H-Model formula in Chapter 9 as follows:
c) If Metallic Engineering’s after-tax cost of debt is 5%, determine the WACC with retained earnings and new common equity.
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