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Gizmo Inc has outstanding 10 year bonds with a 10% coupon rate, annual payments selling for $1,250. The par value is $1,000. Gizo Inc. preferred
Gizmo Inc has outstanding 10 year bonds with a 10% coupon rate, annual payments selling for $1,250. The par value is $1,000. Gizo Inc. preferred stock is selling for $100 and pays a dividend of $12.50. Gizmo Inc. common stock has a beta of 2.0. The risk-free rate is 5% and the market risk premium is 5%. The Capital structure based on book value weights is 30% debt, 20% preferred stock and 50% common equity. However, the firm's target capital structure is 20% debt, 10% preferred stock and 70% common equity. The firm has a marginal tax rate of 25%. Gizmo Inc. is considering the purchase of a new machine for 1,000,000. It will be fully depreciated at the time of purchase and can be used for three years at which time it will have a market value of $200,000. Purchase of the new machine will cause an increase in net operating working capital by $250,000. Before tax operating costs are expected to decrease by $600,000 each year. What is the cost of preferred stock? 15.00%10.0%12.50% Question 13 (1 point) What is the cost of common equity? 15.00%12.50%10.70%
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