Tex-Mex by Rex, Inc. is planning its yearly budget and has the following potential independent proposals:

PROJECT OUTLAY IRR

A $5,000,000 11.0%

B $5,000,000 18.0%

C $8,000,000 16.0%

D $12,000,000 10.5%

E $12,000,000 12.0%

The firms capital structure shown below is considered optimal and will be maintained:

Debt $80,000,000

Preferred Stock $20,000,000

Common Equity $100,000,000

The firm has a marginal tax rate of 35% and has $5,000,000 of retained earnings available for investment. Four years ago, Tex-Mex by Rex, Inc. paid a common stock dividend of $3.75 a share. Yesterday, they paid a dividend of $5.00. Assume that this dividend growth rate continues for the indefinite future. The market price for its common stock is $82 with a beta of 1.25. Currently, the YTM on T-Bonds is 2% and the expected market return is 10%. Tex-Mex by Rex, Inc. can raise funds under the following limitations:

BONDS: New 20-year $1000 par value bonds carrying a coupon of 12% (annual) are priced to yield the investor 10% a year. Flotation costs total $70.27 per bond.

PREFERRED STOCK: Current shares of preferred stock have a dividend of $3.50 and are selling for $50 per share. Underwriters charge a flotation fee of 12% of the selling price.

COMMON STOCK: New common stock requires flotation costs equal to 13% of the stocks price.

Calculate the Cost of New Common Stock

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