Write your name above and on your scan form. Answer all 25 questions, marking th

Question

Write your name above and on your scan form. Answer all 25 questions, marking the letter of the best response on your scan form. (Only it will be graded.) You may write on this exam. Take as much time as necessary. Use any resources available, except each other. (Do not collaborate.) Turn in both the scan form and this exam at the beginning of class on Tuesday, December 1. A firm must earn the marginal cost of capital on new investments if it is to meet the return requirements of all investors. A breakpoint will occur in the MCC schedule whenever the cost of a capital component rises. The cost of retained earnings can be less than, equal to, or greater than the cost of new common stock, depending on taxes, flotation costs, investors attitudes, etc. Santorum Co. has a capital structure of 50% debt, 20% preferred stock, and 30% common stock. Net income is forecast to be $1,000,000. The company pays out 40% of its earnings as dividends. How much new capital can the firm raise without having to issue new common shares or change its capital structure? (That is, what is the breakpoint associated with retained earnings?) Martin Corporation's common stock sells for $50 per share. The current dividend is $2.00 per share. If dividends are expected to grow at 6% per year and if flotation costs are 10%, what is the firm's cost of retained earnings and what is its cost of new common stock? Hilliard Corp. needs to estimate its cost of capital. The company's CFO has the following information:

Explanation / Answer

Part 1 Satement is true , A firm should invest until the margianl cost of capital equals the rate of returns Part 2 Satement is true , A break point will occur in the MCC whenever the cost of one or more components rises,if there are n separate bresk,there will be n+1 different weighted avg cost of capital Part 3 Satement is false The cost of retained earnings is slightly less than the cost of common stock, as it excludes transaction costs and taxes associated with dividends Part 4 1000000*.60% ie retained earnings =600,000

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