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During the last few years, Jana Industries has been too constrained by the high cost of capital to make many capital investments. Recently, though, capital
During the last few years, Jana Industries has been too constrained by the high cost of capital to make many capital investments. Recently, though, capital costs have been declining, and the company has decided to look seriously at a major expansion program proposed by the marketing department. Assume that you are an assistant to Leigh Jones, the financial vice president. Your first task is to estimate Janas cost of capital. Jones has provided you with the following data, which she believes may be relevant to your task:
The firms tax rate is
The current price of Janas coupon, semiannual payment, noncallable bonds with years remaining to maturity is $ There are bonds. Jana does not use shortterm interestbearing debt on a permanent basis. New bonds would be privately placed with no flotation cost.
The current price of the firms $ par value, quarterly dividend, perpetual preferred stock is $ There are outstanding shares. Jana would incur flotation costs equal to of the proceeds on a new issue.
Janas common stock is currently selling at $ per share. There are million outstanding common shares. Its last dividend
Dwas $ and dividends are expected to grow at a constant rate of in the foreseeable future. Janas beta is the yield on Tbonds is and the market risk premium is estimated to be For the ownbondyieldplusjudgmentalriskpremium approach, the firm uses a risk premium.
Janas preferred stock is riskier to investors than its debt, yet the preferred stocks yield to investors is lower than the yield to maturity on the debt. Does this suggest that you have made a mistake? Hint: Think about taxes.
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