Question
Access to the financial market is challenging. AR Corporation is considering a new debt-equity mix to save on cost of funds. The following capital structure
Access to the financial market is challenging. AR Corporation is considering a new debt-equity mix to save on cost of funds. The following capital structure is given for the company: Bonds, 7% P 3,000,000 Preferred Stock, P50 2,400,000 Common Stock 3,600,000 Retained Earnings 3,000,000 ----------------- P12,000,000 ========== Dividends on common stock are currently at P30 per share and are expected to grow at a constant rate of 6 percent. Market price per share of common stock is P400, and the preferred stock is selling at P500. Flotation cost on new issues of common stock is 10 percent. The interest on bonds is paid annually. The companys tax rate is 40 percent. Calculate the following: (a) The cost of debt (b) The cost of preferred stock (c) The cost of retained earnings (internal equity) (d) The cost of new common stock (external equity) (e) The weighted average cost of capital considering all four sources of funds Determine the least costly capital structure for the company. Justify
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