Byron Corporation\'s current and target capital structure, is 40 percent debt an
ID: 2739462 • Letter: B
Question
Byron Corporation's current and target capital structure, is 40 percent debt and 60 percent common equity. Next year's net income is projected to be $21,000, and Byron's payout ratio is 30 percent. The company's earnings and dividends are growing at a constant rate of 5 percent; the last dividend (D0) was $2.00; and the current equilibrium stock price is $21.88. Byron can raise all the debt financing it needs at 8 percent. If Byron issues new common stock, a 20 percent flotation cost will be incurred. The firm's marginal tax rate is 38 percent.
a. What is the maximum amount of new capital that can be raised at the lowest component cost of equity?,
b. What is the after-tax cost of debt?
c. What is the cost of retained earnings?
d. what is the cost of externally equity?
e. What is the weighted average cost of capital below the break point assuming your answer to part D is correct? And ifyour answer for part D was 11%?
Explanation / Answer
ANSWER A: Breakpoint equals the amount of lower cost capital available divided by the weight of that component in the capital structure. = [ $21,000 * 0.70 ] / (1-0.38) = $ 23709.68
ANSWER B:- After Tax cost of Debt = 8 ( 1- 0.38) = 4.96%
ANSWER C:- Cost of Retained Earnings =D1 / P0 + g = 2(1.05)/21.88 + 0.05= 14.5978%
ANSWER D:- Cost of External equity = 2*1.05 / 21.88( 1- 0.20) + 0.05 = 17%
ANSWER E:- 0.40 * 4.96 + 0.60 * 17% = 12.18%
if cost if Equity = 11% = 0.40*4.96 + 0.60 * 11 =8.58%
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.