A company has an optimal capital structure as follows: Total assets ....... $600,000 Debt ........ $300,000 Preferred

Question:

A company has an optimal capital structure as follows:

Total assets ....... $600,000

Debt ........ $300,000

Preferred Stock ..... $100,000

Common Equity ..... $200,000

What would be the minimum expected return from a new capital investment project to satisfy the suppliers of the capital? Assume the applicable tax rate is 30 percent, YTM of its debt is 11 percent, a flotation cost per share of preferred stock is $0.75, and flotation cost per share of common stock is $4. The preferred and common stocks are selling in the market for $26 and $143 a share, respectively, and they are expected to pay a dividend of $2 and $7, respectively, in one year. The company’s dividends are expected to grow at 13 percent per year. The firm would like to maintain the forgoing optimal capital structure to finance the new project

Common Stock
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Stocks or shares are generally equity instruments that provide the largest source of raising funds in any public or private listed company's. The instruments are issued on a stock exchange from where a large number of general public who are willing... Capital Structure
Capital structure refers to a company’s outstanding debt and equity. The capital structure is the particular combination of debt and equity used by a finance its overall operations and growth. Capital structure maximizes the market value of a... Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their... Expected Return
The expected return is the profit or loss an investor anticipates on an investment that has known or anticipated rates of return (RoR). It is calculated by multiplying potential outcomes by the chances of them occurring and then totaling these...