Rolodex Inc. is in the process of determining its capital budget for the next fiscal year. The firm's current capital structure, which it considers to be optimal, is contained in the following balance sheet: Note: For this problem, use the book value of the items to get the capital structure. However, you normally want to use the market values. Long-term debt is the only debt capital structure account. Add common stock, capital in excess of par, and RE to get common equity. Rolodex Inc. Balance Sheet (in Millions of Dollars) Accounts payable Other current liabilities Current assets $ 105 Fixed assets 255 Total assets $360 Long-term debt Preferred stock Common stock (15 million shares at par) Contributed capital in excess of par Retained earnings Total liabilities and equity $ 35 25 90 60 15 30 105 $360 Discussions between the firm's financial officers and the firm's investment and commercial bankers have yielded the following information: Rolodex can borrow $30 million from its bank at a pretax cost of 11 percent. Rolodex can borrow $25 million by issuing bonds at a net price of $875 per bond. The bonds would carry a 13 percent coupon rate and mature in 15 years. . Additional debt can be issued at a 16 percent pretax cost Preferred stock can be issued at a pretax cost of 18 percent. Rolodex expects to generate $120 million in net income and pay $2.15 per share in dividends. Hint: RE = Net income-total common dividends. There are 15m shares shown as outstanding in the balance The $2.15 per share dividend (D) represents a growth of 5.5 percent over the previous year's dividend. This growth rate is expected to continue for the foreseeable future. The firm's stock currently is trading at $16 per share. Rolodex can raise external equity by selling common stock at a net price of $14 per share. Rolodex's marginal tax rate is 40 percent. First increment: Second increment: Third increment: Additional funds: Weighted marginal cost of capital % % % % Rolodex Inc. is in the process of determining its capital budget for the next fiscal year. The firm's current capital structure, which it considers to be optimal, is contained in the following balance sheet: Note: For this problem, use the book value of the items to get the capital structure. However, you normally want to use the market values. Long-term debt is the only debt capital structure account. Add common stock, capital in excess of par, and RE to get common equity. Rolodex Inc. Balance Sheet (in Millions of Dollars) Accounts payable Other current liabilities Current assets $ 105 Fixed assets 255 Total assets $360 Long-term debt Preferred stock Common stock (15 million shares at par) Contributed capital in excess of par Retained earnings Total liabilities and equity $ 35 25 90 60 15 30 105 $360 Discussions between the firm's financial officers and the firm's investment and commercial bankers have yielded the following information: Rolodex can borrow $30 million from its bank at a pretax cost of 11 percent. Rolodex can borrow $25 million by issuing bonds at a net price of $875 per bond. The bonds would carry a 13 percent coupon rate and mature in 15 years. . Additional debt can be issued at a 16 percent pretax cost Preferred stock can be issued at a pretax cost of 18 percent. Rolodex expects to generate $120 million in net income and pay $2.15 per share in dividends. Hint: RE = Net income-total common dividends. There are 15m shares shown as outstanding in the balance The $2.15 per share dividend (D) represents a growth of 5.5 percent over the previous year's dividend. This growth rate is expected to continue for the foreseeable future. The firm's stock currently is trading at $16 per share. Rolodex can raise external equity by selling common stock at a net price of $14 per share. Rolodex's marginal tax rate is 40 percent. First increment: Second increment: Third increment: Additional funds: Weighted marginal cost of capital % % % %
