A company has a capital structure of 45% debt, 5% preferred stock and 50% common
ID: 2383691 • Letter: A
Question
A company has a capital structure of 45% debt, 5% preferred stock and 50% common equity.
(a) The company can obtain unlimited debt at an interest rate of 10%. The marginal tax rate is 35%. Find the after-tax cost of debt.
(b) Preferred stock carries a dividend of $14 and currently selld for $120. Flotation cost on preferred stock is 10 pounds per share. What is the cost of preferrd stock?
(c) Their current stock price is $25. The next dividend is expected to be $2.56 and growth is constant at 8%. If new common stock is issued, it will have a flotation cost of 10%. Find the cost of retained earnings and the cost of issuing new common shares.
(d) If the net income is expected to be $1 600 000, and the company's policy is to pay 50% of net income for dividends, what is the break point caused by using all of retained earnings?
(e) Find the WACC using retained earnings and the WACC when new equity is issued.
Explanation / Answer
(A) Interest Rate 10% Tax Rate 35% After Tax Cost of Debt 10*(1-0.35) 6.5% (B) Preferred Stock Dividend 14 Current Market Price 120 Floatation Cost 10 pound per share 15 Assuming 10 pound = 15 dollars Adjusted Market Price (120-14) 105 Cost of Prefered Stock 14/105 13.33% (c ) Dividend 2.56 Current Stock Price 25 Less Floatation Cost 10%of 25 2.5 Net Curent Stock Price 22.5 Growth Rate 8% Cost of current stock (D1/Net Price) + g 19.38% Cost of Retained Earning Dividend 2.56 Current Stock Price 25 Growth Rate g 8% Cost of Retained Earning 2.56/25 18.24% (d) Net Income 1600000 Dividend Policy 50% of Net Income Break Even Point using all of retained earnings 1600000*(1-0.5) 800000 (e) WACC using retained earnings WACC = (wd)(kd)(1-t) + (wps)(kps) + (wce)(kce) (0.45*6.5)+(0.05*13.33)+(0.50*18.24) 12.7115 WACC when new equity is issued. (0.45*6.5)+(0.05*13.33)+(0.50*19.38) 13.2815
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.