Question
It is your job to determine your companys marginal cost of capital schedule. The firms current capital structure, which it considers optimal, consists of 30%
It is your job to determine your companys marginal cost of capital schedule. The firms current capital structure, which it considers optimal, consists of 30% debt, 20% preferred stock, and 50% common equity. The firm has determined that it can borrow up to $15 million in debt at a pre-tax cost of 7%, an additional $9 million at a pre-tax cost of 9%, and any additional debt funds at 11%. The firm expects to retain $25 million of its earnings; any additional income can be raised by issuing new common stock. The firms common stock currently trades at $30 per share, and it pays a $3.00 per share dividend. Dividends are expected to grow at a 5% annual rate over time. If the firm issues new common stock it will be sold to the public at a 10% discount. There will also be a $2.00 per share flotation cost. Preferred stock can be issued in unlimited quantities at a pre-tax cost of 12%. If the firm has the following investment opportunity schedule, determine the firm's optimal capital budget. Assume a tax rate of 40%.
Project Investment/ IRR
A $25m /19.0%
B $15m /12.5%
C $16m /15.0%
D $10m/ 12.0%
E $14m /13.0%
F $6m /11.0%
G $7m/ 12.9%
H $60m /9.0%
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