Question
COST OF CAPITAL ASSIGNMENT STEPHANIES CAJUN FOODS, INC NEEDS TO DETERMINE THEIR COST OF CAPITAL FOR CAPITAL BUDGETING PURPOSES. THEY HAVE ASSEMBLED THE FOLLOWING INFORMATION:
COST OF CAPITAL ASSIGNMENT
STEPHANIES CAJUN FOODS, INC NEEDS TO DETERMINE THEIR COST OF CAPITAL FOR CAPITAL BUDGETING PURPOSES. THEY HAVE ASSEMBLED THE FOLLOWING INFORMATION:
MARKET PRICE OF OUTSTANDING BONDS 95
COUPON RATE SEMI-ANNUAL PAYMENTS 11.0%
MATURITY VALUE $ 1,000
YEARS TO MATURITY 25
FLOTATION COSTS 2%
CORPORATE TAX RATE 21%
MARKET PRICE OF OUTSTANDING PREFERRED $ 50
PAR VALUE $ 25
DIVIDEND (PERCENTAGE OF PAR) 10%
FLOTATION COSTS 1%
MARKET PRICE OF COMMON STOCK $ 60
CURRENT STOCK DIVIDEND $ 7.50
GROWTH RATE 4.0%
FLOTATION COSTS 5.0%
TARGET CAPITAL STRUCTURE
BONDS 10.00%
PREFERRED STOCK 20.00%
COMMON STOCK 30.00%
RETAINED EARNINGS 40.00%
THE CURRENT CAPITAL STRUCTURE, BASED ON BOOK VALUES, APPEARS AS FOLLOWS:
BONDS $ 20,000,000
PREFERRED STOCK 1,000,000
COMMON STOCK (PAR $10) 30,000,000
RETAINED EARNINGS 80,000,000
CALCULATE: A) THE COMPONENT COSTS OF CAPITAL
- THE WEIGHTED AVERAGE COST OF CAPITAL AT BOOK VALUE WEIGHTS
- THE WEIGHTED AVERAGE COST OF CAPITAL AT MARKET VALUE WEIGHTS
- THE WEIGHTED AVERAGE COST OF CAPITAL AT TARGET VALUE WEIGHTS
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started