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Background to question: The management of a conservative firm has adopted a policy of never letting debt exceed 28% of their total financing. The firm
Background to question:
The management of a conservative firm has adopted a policy of never letting | |||||||||||||||||
debt exceed 28% of their total financing. The firm will earn $100,000,000 but | |||||||||||||||||
distribute 30% in dividends, so the firm will have $70,000,000 to add to retained | |||||||||||||||||
earnings. Currently the price of the stock is $51; the company pays a $1.50 per share | |||||||||||||||||
dividend, which is expected to grow annually at 10%. If the company sells new shares, the net | |||||||||||||||||
to the company will be $49.45. |
Question:
The firm raises funds in increments of $4,000,000 consisting of $1,120,000 in | ||||||||
debt and $2,880,000 in equity. This strategy maintains the capital structure of | ||||||||
28% debt and 72% equity. Develop the marginal cost of capital schedule through | ||||||||
$16,00,000. What impact would each of the following have on the marginal | ||||||||
cost of capital schedule? | ||||||||
e) The firms income tax rate increases. | ||||||||
f) The firm retains all of its earnings and the price of the stock is unaffected. | ||||||||
g) $16,000,000 is insufficient to meet attractive investment opportunities. |
Please show work, Excel preferred
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