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
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