Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Question 1 On January 1, 2019, the total assets of the Dexter Company were $270 million. The firm's present capital structure, which follows, is considered

Question 1

On January 1, 2019, the total assets of the Dexter Company were $270 million. The firm's present capital structure, which follows, is considered to be optimal. Assume that there is no short-term debt.

Long-term debt $135,000,000

Common equity $135,000,000

New bonds will have a 10 percent coupon rate and will be sold at par. Common stock, currently, selling at $60 a share, can be sold to net the company $54 a share. Stockholders' required rate of return is estimated to be 12 percent., consisting of a dividend yield of 4 percent and an expected growth rate of 8 percent. (The next expected dividend is $2.40, so $2.40/$60 = 4%.)

Retained earnings are estimated to be $13.50 million. The marginal tax rate is 40 percent. Assuming that all asset expansion (gross expenditures for fixed assets plus related working capital) is included in the capital budget, the dollar amount of the capital budget, ignoring depreciation is $135 million. The marginal tax rate is 40 percent. Assuming that all asset expansion (gross expenditures for fixed assets plus related working capital) is included in the capital budget, the dollar amount of the capital budget, ignoring depreciation is $135 million.

Required:

1. To maintain the present capital structure, how much of the capital budget must Dexter finance by equity? (4 marks)

2. How much of the new equity funds needed will be generated internally? Externally? (3 marks)

3. Calculate the cost of each of the equity components. (5 marks)

4. At what level of capital expenditure will there be a break in Dexter's Marginal Cost of Capital schedule? (3 marks)

5. Calculate WACC. (5 marks)

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

Principles of Finance

Authors: Scott Besley, Eugene F. Brigham

6th edition

9781305178045, 1285429648, 1305178041, 978-1285429649

More Books

Students also viewed these Accounting questions

Question

(a) If 0 Answered: 1 week ago

Answered: 1 week ago