1. Sixer's has a marginal tax rate of 34%. The firm recently paid a cash dividend of $6.00 to its common stockholders. Earnings and dividends are expected to grow at 4% per year for the foreseeable future. If the firm issues new common stock, the shares should sell for $30 each. Flotation costs will amount to $2.00 per share. What would be the firm's cost of external equity?
2. Big Bob Corporation has a present capital structure consisting of common stock (10 million shares) and debt ($140 million, 6% coupon rate). The company needs to raise $46 million and is undecided between two financing plans. Plan A: Equity financing. Under this plan, an additional common stock will be sold at $15 per share. Plan B: Debt financing. Under this plan, the firm will issue 10% coupon bonds. At what level of operating income (EBIT) will the firm be indifferent between the two plans? Assume a 40% marginal tax rate.
3. Your dad will give you the following amounts at the end of the stated year: Year 2: $4,000 Year 4: $6,000 Year 6: $10,000 Year 8: $12,000 Instead of spending the money, you decide to put it in account earning 16%. How much will you have at the end of year 12?