Question
1. Biogenetics Corporation has a target capital structure of 60 % common stock, and the rest on bonds. The risk free rate is 5%, and
1. Biogenetics Corporation has a target capital structure of 60 % common stock, and the rest on bonds. The risk free rate is 5%, and the return on the stock market is 15%. This year, Biogenetics bonds had an YTM of 5.5%, and the company is on the 35 percent tax bracket. On last trading day, Biogenetics paid dividends of $3/share , which will grow at 3% every year. Last trading day the stock was selling at $30. The company beta is 1.5.
The company president has approached you about the company capital structure. He wants to know why the company doesnt use more stock financing, since it costs less than debt. What would you tell the president? (5 points)
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