In October $2023,$ Stevens Corporation executives were working on their capital budget for

$2024.$ Stevens expects to have the following book value capital structure on December $31,2023$:

Debt $$12,000,000$

Preferred stock $(25,000$ shares$)2,500,000$

Common stock $(1,000,000$ shares$)5,000,000$

Retained earnings $10,000,000$

Total capital $$29,500,000$

$[4]$

Earnings per share have grown steadily over the past $10$ years, from $$1\mathrm{.}65$ in $2014$ to $$3\mathrm{.}00$ projected

for $2024.$ The investment community expects growth to continue at a slower rate; the average past

growth rate of $9\%$ has recently dropped to $5\%,$ and it is expected to remain constant at this level. Based

on a $5\%$ growth rate, this stock now sells at a price$/$earnings ratio of $6$x $($i$.$e$.,$ the price is $6$ times the

earnings per share$).$ The last dividend $($

D$0$

$)$ was $$1\mathrm{.}88.$ It is expected to increase at the new $5\%$ growth

rate.

Steven$$s preferred stock, issued several years ago, has a book value of $$100$ per share and pays a

dividend of $$9.$ The yield currently on preferred stock of this degree of risk is $11\mathrm{.}25\%.$

The debt consists of $$12,000,000$ of $$1,000$ par, $20-$year bonds with a $4\mathrm{.}135\%$ coupon, payable

semiannually. These bonds were issued $7$ years ago and have $13$ years to maturity. The yield to maturity

for these bonds is currently $6\%.$ The addition to retained earnings projected for $2024$ is $$1,026,000.$

These funds will be available during the $2024$ budget year. The corporate tax rate, including state

income taxes, is $40\%.$ In addition, new securities can be sold at the following costs:

Debt: Up to $$3$ million of new bonds can be sold at a cost of $6\mathrm{.}67\%.$ Debt from $$3$ to $$5$ million would

cost $7\%,$ while all debt over $$5$ million would cost Stevens $9\mathrm{.}33\%.$

Preferred: Additional preferred stock can be sold to investors at a price of $$100$ per share $($which is par

value$)$ with a dividend of $11\mathrm{.}25\%,$ but the company will incur a $5\%$ floatation cost and hence net $$95.$

Common: Up to $$3$ million of new common stock can be sold at the current market price, with an

underwriting cost of $5\%.$ All common stock over $$3$ million would also have underwriting costs of $5\%,$

but the offering price must be lowered to $$16\mathrm{.}11.$

a$.$ Determine Stevens's capital structure based on $($i$)$ book value and $($ii$)$ market value.

b$.$ Determine the costs of $($i$)$ the new preferred stock and $($ii$)$ the two types of new common

stocks.

c$.$ At what dollar amounts of new capital will breaks occur in the MCC schedule?

d$.$ Calculate the WACC in the interval between each of these breaks using the book value capital

structure and then plot the MCC schedule.

e$.$ Calculate the WACC in the interval between each of these breaks using the market value

capital structure and then plot the MCC schedule.