Using the information provided below, answer the questions that follow. Growth r

Question

Using the information provided below, answer the questions that follow.

Growth rate of dividends and common stock share price = 4%, Interest rate = 6%, Risk free rate of return = 5%, Return on the market = 12%, Tax bracket = 40%, Dividend on common stock (past year) = $3, Dividend on preferred stock = $4, Price per share of common stock = $30, Price per share of preferred stock = $100, Beta = 1.3.

Assume that items in the balance sheet below are in the desired proportion. (The current capital structure is the target capital structure.)

_________________________________________________

Assets $100,000,000               Long -term debt   $45,000,000

                                                Preferred stock     $10,000,000

                                                Common stock     $30,000,000

                                                Retained earnings $15,000,000

a.)    What is this firm

Explanation / Answer

1. After tax cost of debt = Before tax Interest rate x (1

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