Meacham Corp. wants to issue bonds which can be sold at a market price of $540.27 for each
bond. The bond will have 8 years maturity period. Meacham Corp. common stock currently sells for
$30 per share. Meacham can sell additional shares by incurring flotation costs of $3 per share.
Meacham paid a dividend yesterday of $4.00 per share and expects the dividend to grow at a constant
rate of 5% per year. Meacham also expects to have $12 million of retained earnings available for use
in capital budgeting projects during the coming year. Meacham’s capital structure is 40% debt and
60% common equity. Meacham’s marginal tax rate is 35%.
a. Calculate the cost of debt before tax and after-tax cost of debt assuming Meacham’s bonds are its
b. Calculate the cost of retained earnings.
c. Calculate the cost of new common stock.
d. Calculate the weighted average cost of capital assuming Meacham’s total capital budget is $30