Question
IGT Incorporated has common stock that currently sells for $20 pershare. IGT expects EPS of $3 per share1 0 this year (EPS = $3), IGT
IGT Incorporated has common stock that currently sells for $20 pershare. IGT expects EPS of $3 per share1 0 this year (EPS = $3), IGT paid a dividend of $1.40 last year (D = $1.40), and IGT has a growth rate ondividends of 7% that is expected to continue. New issues of common stock are subject to flotation costsof 20%.IGTs corporate bonds currently sell for $1,085.44, pay a 12% semi-annual coupon, mature in 30 years,and a new issue of these bonds are subject to flotation costs of 3%. IGTs tax rate is 40%.IGTs preferred stock currently sells for $32.00, dividends are paid at the rate of 10%, par value of thepreferred stock is $40.00, and flotation costs on preferred stock is 8%.IGT Inc. can obtain funds for future investments through retained earnings, new issues of common stock,issuance of debt, and issuance of preferred stock. Management base their cost of capital on the followingtarget capital structure: 20% debt, 10% preferred stock, and 70% common stock. IGT has $35 millionavailable in retained earnings.(A) What is IGT's cost of retained earnings?(B) What is IGT's cost of new common stock?(C) What is IGT's after-tax cost of a new issue of debt?(D) What is IGT's cost of new preferred stock?
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