Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Could you possible help me with this finance question? Thank you!! You develop the following information. Your firm has a target capital structure of 70%

Could you possible help me with this finance question?

Thank you!!image text in transcribed

You develop the following information. Your firm has a target capital structure of 70% common equity, 5% preferred stock and 25% debt. The firm's tax rate is 25%. The firm can issue up to S200,000 worth of debt at a before-tax cost of 9%. Then it will cost the firm 11% before-tax on debt up to S400,000. After that point, the before-tax cost of debt will be 13%. The firm's preferred stock carries an annual dividend of $2 per share. The issue price of the preferred would be S25 with 1.5% of the issue price charged as flotation costs. The firm expects to have S950,000 in earnings and have a dividend payout ratio of 65%. The firm bases its cost of retained earnings on the CAPM approach. For this purpose, you determine the growth rate of the market will be 5% and the market dividend yield is 2%. The risk-free rate is 3%. The firm's beta is 1.05. The firm can issue new common stock with a $0.50 dividend, price of $20 per share, flotation costs of 1.75% of issue price and growth rate expected of 6%. cost 10% for new common stock. This holds for up to $630,000 in equity after which it will 1) Determine the marginal cost of capital schedule. 2) Determine which projects you would accept and what the optimal capital budget would be by combining the investment opportunity schedule (information below) and marginal cost of capital schedule Project Initial Cost IRR S375.000 8.5% 5300,000 1196 175,000 10% 100,000 7.5% 200,000 6%

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

The Future Of Financea The LSE Report

Authors: Chairman Adair Turner, Paul Woolley, Andrew Dr Haldane, Richard Layard, Andrew G. Haldane, Paul Wooley

1st Edition

085328458X, 978-0853284581

More Books

Students also viewed these Finance questions