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Background: On January 1, 2010, the total assets of Dennis Corporation were $270 million. The firms present capital structure of 50% debt and 50% equity

Background: On January 1, 2010, the total assets of Dennis Corporation were $270 million. The firms present capital structure of 50% debt and 50% equity is considered optimal.

Dennis has the following options available to raise capital to fund its $135 million capital budget for the year:

Bonds offering a 10% coupon, sold at par.

Common Stock, market price of $60 per share with a $6 per share float cost. Stockholders demand a 12% rate of return which consists of a dividend of 4% and an expected growth rate of 8%. The next expected dividend is $2.40.

Dennis has $13.5 million of Retained Earnings at its disposal. a. In order to maintain the current capital structure, how much of Denniss capital budget should be financed by equity? (4 pts)

Capital Budget = $135 Million

Equity required = $135 * 50% = $67.5 Million

Question:

Calculate the weighted average costs of capital. (6 pts)

Draw and label a generic MCC / IOS schedule. Explain the use of plotting the MCC and IOS schedules to determine which projects to accept.(5 pts)

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