Penguin Industries, Inc., has a capital structure that currently consists of 40 percent debt and 60 percent

Question:

Penguin Industries, Inc., has a capital structure that currently consists of 40 percent debt and 60 percent common stock, which it considers optimal. Penguin can raise up to $60 million in long-term debt at a pretax cost of 10 percent.

Above $60 million, the pretax cost of debt is expected to increase to 14 percent.

The company’s marginal tax rate is 40 percent. Its stock currently sells for

$60 per share and has a beta of 1.20. The company is expected to pay a

$3.60 per share dividend next year, which is expected to grow at a rate of 6 percent per year for the foreseeable future. Penguin expects to generate $180 million in retained earnings during the coming year. New shares can be sold to net the company $56 per share. Determine the marginal cost of capital schedule and the break points in the schedule for Penguin.  LO1

Fantastic news! We've Found the answer you've been seeking!

Step by Step Answer:

Related Book For  book-img-for-question
Question Posted: