Question 17 Floorstreet Stock Raiders Incorporated (FSR) has the following capital structure: Debt 25%, Preferred Stock 15%, Common Equity 60%. FSR's beta is 1.5. FSR's expected net income this year is $34,285.72, its established dividend payout ratio is 30 percent, its corporate tax rate is 40 percent, and investors expect earnings and dividends to grow at a constant rate of 9 percent in the future. FSR paid a dividend of $3.60 per share on its 76,000 issued ordinary shares. The Treasury note rate is 4.3% and the market risk premium is 8%. FSR can obtain new capital in the following ways: + Preferred: Issue 10,800 new preference shares committing FSR's to a dividend of $11. The preference shares can be sold to the public at a price of $95 per share. + Debt: Issue 1,800 ten year $1,000 par value bonds to the public. The bonds will pay 11.115% coupons (annually) and have a current yield to maturity of 12%. a. What is the firm's cost of debt? b. What is the firm's cost of preferred equity? c. What is the firm's cost of ordinary equity? d. What is the firm's overall cost of capital? e. The following investment opportunities have the same level of risk with FSR. Which projects should FSR accept? Why? PROJECT COST at t=0 RATE OF RETURN A $10,000 17.4% BCDE 20.000 16.0% 10,000 14.2% 20.000 13.7% 10.000 12.0%