The management of a conservative firm has adopted a policy of never letting debt
ID: 2686624 • Letter: T
Question
The management of a conservative firm has adopted a policy of never letting debt exceed 30 percent of total financing. The firm will earn $10,000,000 but distributed 40 percent in dividends, so the firm will have $6,000,000 to add to retained earnings. Currently the price of the stock is $50; the company pays a $2 per share dividend, which is expected to grow annually at 10 percent. If the company sells new shares, the net to the company will be $48. Given this information, what is the a. cost of retained earnings; b. cost of new common stock? The rate of interest on the firm's long-term debt is 10 percent and the firm is in the 32 percent income tax bracket. If the firm issues more than $2,400,000, the interest rate will rise to 11 percent. Given this information, what is the c. cost of debt; d. cost of debt in excess of $2,400,000?Explanation / Answer
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