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Problem 1 Martin Mechanical (MM) has a capital structure made up of 60% debt, 10% preferred shares and 30% common equity. The company has S
Problem 1 Martin Mechanical (MM) has a capital structure made up of 60% debt, 10% preferred shares and 30% common equity. The company has S 15,000,000 of cash on hand for investment in possible projects. MM can borrow money at a market yield of 6%. As this money will be borrowed from a bank that MM already does business with there will be no flotation costs. Preferred shares can be sold for S60 each, paying an annual dividend of $4. Flotation costs will be S3 per share. MM's common shares are currently trading at $26 per share. Last year they paid a dividend of $1.10 per share. Growth over the last five years has consistently been 5% and management believes that this rate will continue for at least the next few years. If MM finds that they need to issue new common shares they will have flotation costs of 3% of the market value of the common shares. MM's corporate tax rate is 30%. Required 1) Calculate how much MM can invest without needing to issue new common shares. 2) Compute the weighted average cost of capital prior to the amount determined in part 1 3) Compute the weighted average cost of capital after the amount determined in part 1. Problem 1 Martin Mechanical (MM) has a capital structure made up of 60% debt, 10% preferred shares and 30% common equity. The company has S 15,000,000 of cash on hand for investment in possible projects. MM can borrow money at a market yield of 6%. As this money will be borrowed from a bank that MM already does business with there will be no flotation costs. Preferred shares can be sold for S60 each, paying an annual dividend of $4. Flotation costs will be S3 per share. MM's common shares are currently trading at $26 per share. Last year they paid a dividend of $1.10 per share. Growth over the last five years has consistently been 5% and management believes that this rate will continue for at least the next few years. If MM finds that they need to issue new common shares they will have flotation costs of 3% of the market value of the common shares. MM's corporate tax rate is 30%. Required 1) Calculate how much MM can invest without needing to issue new common shares. 2) Compute the weighted average cost of capital prior to the amount determined in part 1 3) Compute the weighted average cost of capital after the amount determined in
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