A firm has determined its optimal capital structure, which is composed of the following sources and target market value proportions.
Table 1:
Source of capital: long term debt Target Market Proportions: 20% Source of capital: preferred stock Target Market Proportions: 10 Source of capital: common stock equity Target Market Proportions: 70
Debt: The firm can sell a 12-year, $1,000 par value, 7 percent bond for $960. A flotation cost of 2 percent of the face value would be required in addition to the discount of $40.
Preferred Stock: The firm has preferred stock selling at $72 per share par value. The stock pays a $10 annual dividend.
Existing Common Stock: A firm’s common stock is currently selling for $18 per share. The dividend expected to be paid at the end of the coming year is $1.74 and the dividend rate has grown at 5% per year and should continue to do so for the forseeable future.
New common stock if issued must be underpriced $1 per share in floatation costs.
Additionally, the firm’s marginal tax rate is 40 percent.
Questions are:
1) What is the firm’s before-tax cost of debt? (See Table 1)
2) What is the firm’s after-tax cost of debt? (See Table 1)
3) What is the firm’s cost of preferred stock? (See Table 1)
4) What is the firm’s cost of a new issue of common stock?
5) The firm’s cost of retained earning is?
6) The weighted average cost of capital up to the point when retained earnings are exhausted is?
7) If the target market proportion of long term debt is reduced to 15 percent- increasing the proportion of common stock equity to 75 percent, what will be the revised weighted average cost of capital?
4) What is the weighted
average cost of capital? (See Table 1)
They have a magnificent team. These people are always kind and willing to listen to your concerns or issues. Better yet, your assignment is always ready before the time, they usually send you a draft to double-check before they finalize your paper.
Delivering a high-quality product at a reasonable price is not enough anymore.
That’s why we have developed 5 beneficial guarantees that will make your experience with our service enjoyable, easy, and safe.
You have to be 100% sure of the quality of your product to give a money-back guarantee. This describes us perfectly. Make sure that this guarantee is totally transparent.
Read moreEach paper is composed from scratch, according to your instructions. It is then checked by our plagiarism-detection software. There is no gap where plagiarism could squeeze in.
Read moreThanks to our free revisions, there is no way for you to be unsatisfied. We will work on your paper until you are completely happy with the result.
Read moreYour email is safe, as we store it according to international data protection rules. Your bank details are secure, as we use only reliable payment systems.
Read moreBy sending us your money, you buy the service we provide. Check out our terms and conditions if you prefer business talks to be laid out in official language.
Read more