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having trouble getting through these problems. Attached if the homework assignment Business 2210 Marginal Cost of Capital Capital Budgeting Brown Company has several capital projects
having trouble getting through these problems. Attached if the homework assignment
Business 2210 Marginal Cost of Capital Capital Budgeting Brown Company has several capital projects they would like to consider and needs to compute their Marginal Cost of Capital. They have compiled the following information: Net Income is $75,000 and the company pays a 40% dividend each year. The last dividend paid on common stock was .75 and the company common stock sells for $30 today. The YTM on their corporate bond is 8%. The bond was issued with a 6% coupon. The company has $100 Par Value, 4% Preferred Stock, which has a current price of $45 per share. The company has a growth rate of 10% and a marginal tax rate of 18% The company would incur 10% floatation costs to issue new common shares. The flotation costs do not apply to the preferred stock. Selected information from the company's balance sheet follows: Long-Term Debt $30,000 Preferred Stock $10,000 Common Equity $60,000 Johnson is considering the following capital projects: Project Cost A $70,000 B $50,000 C $50,000 D $80,000 IRR 14% 6% 8% 18% Compute the Marginal Cost of Capital for Johnson 1. Compute Capital Structure Weights 2. Compute Retained Earnings Break Point a. What is the Value of Retained Earnings? b. Compute Break Point 3. Compute the component costs of: a. Retained Earnings b. New Common Stock c. Preferred Stock d. Debt 4. Determine the Marginal Cost of Capital (before and after the break point). 5. Which capital Projects should Johnson fund
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