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please can you help me a) Pep Company Limited (PCL) has the following capital structure, which it considers to be optimal: debt is 30%; preferred
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a) Pep Company Limited (PCL) has the following capital structure, which it considers to be optimal: debt is 30%; preferred stock is 20%; and common stock is 50%. PCL's tax rate is 25%, and investors expect earnings to grow at a constant rate of 6% in the future. TCL last paid a dividend of $3.50 per share and the stock currently sells at $70 per share. The following terms would apply to new security offerings. Preferred: New preferred could be sold to the public at a price of $88 per share, with a dividend of $8. Flotation costs of $6 per share would be incurred. Debt: Debt could be sold at an interest rate of 12%. Common: New common equity will be raised only by retained earnings. i) Calculate the cost of each capital structure component. ii) Determine the weighted average cost of capital for PCL. b) Logit Limited (LL) wants to determine the best capital structure for its operation. The objective of the firm is to use the structure with the lowest cost of capital. The details of both capital structures are as follows: Structure A Structure B Debt Component 40% 30% 10% 8% After-tax cost of debt 60% 70% Equity component Cost of equity 14% 11% 1) Calculate the weighted average cost of capital for each structure. ii) Given the firm's cost of capital objective, which structure would you recommend to the management of LL Step by Step Solution
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