Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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

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 divided 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)

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

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

Kd=

Kre=

Kcs=

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

BPre =

e. Calculate the weighted average costs of capital. (6 pts)

f. Draw and label a generic MCC / IOS schedule. Explain the use of plotting the MCC and IOS schedules to determine which projects to accept.(5 pts)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Valuation, Measuring And Managing The Value Of Companies

Authors: Tim Koller, Marc Goedhart, David Wessels

7th Edition

1119611865, 9781119611868

More Books

Students also viewed these Finance questions

Question

Describe how different theorists explain change.

Answered: 1 week ago

Question

Wha t is proc rastination? (p. 3 02)

Answered: 1 week ago