On January 1, 2010, the total assets of Dennis Corporation were $270 million. The firms present capital structure of 50% debt and 50% equity is considered optimal.

Dennis has the following options available to raise capital to fund its $135 million capital budget for the year:

Bonds offering a 10% coupon, sold at par.

Common Stock, market price of $60 per share with a $6 per share float cost. Stockholders demand a 12% rate of return which consists of a dividend of 4% and an expected growth rate of 8%. The next expected dividend is $2.40.

Dennis has $13.5 million of Retained Earnings at its disposal. a. In order to maintain the current capital structure, how much of Denniss capital budget should be financed by equity? (4 pts)

Capital Budget = $135 Million

Equity required = $135 * 50% = $67.5 Million

b. How much of the new equity funds will be generated internally, and how much will be generated externally? (5 pts)

Retained earning (Internal Equity) = $13.5 Million

External equity = 67.5 - 13.5 = $ 54 Million

c. Using Denniss corporate tax rate of 40%, calculate the after-tax cost of each component of capital. (6 pts)

Kd= I (1-t) = 10 (1 - 0.40) = 6%

Kre= (D1/Price + g ) *100

= (2.40/60 + 0.08 0 *100 = 12%

Kcs= (D1 / (Price - Flotation cost) + g) * 100

= (2.40 /(60-6) + 0.08 ) * 100 = 12.44%

d. At what level of Denniss capital budget will a break occur? (4 pts)

BPre =

Break up of capital structure

Cost change in equity due to retained earning = 13.5/0.5 = $27 Million

Therefore the breakups are

i)Below $27 Million

ii) Above $27 Million

e. Calculate the weighted average costs of capital.

PLEASE ANSWER QUESTION E!!