Mr Anderson Ltd. is considering a number projects and thus need to estimate its cost of capital in order to estimate their NPV. 

 The company's current dividend is $2.25 per share, which has grown steadily at 6% each year for over a decade and is expected to continue doing so.  Its stock currently trades at $26 and there are 2 million shares outstanding.  The company's 100,000 preferred shares trade at $22 and pay annual dividends of $3.  Cash and marketable securities on the company's balance sheet total $30.5 million and the firm pays a tax rate of 30%. 

 Their existing long-term debt (face value of $100 million, semi-annual payments) pays a 9.5% coupon and has 12 years remaining before maturity.  Due to current conditions, the required rate of return (yield to maturity) on this debt is 11% and any new debt issuance would be required to offer the same yield to investors (there is no term premium for 1 year vs 12 year debt).

 

a) What is Anderson's Debt/Equity ratio? 

b) Assuming the firm wants to maintain its current capital structure, how much debt can Mr. Anderson issue before having to issue new equity?