Question
The financial data for a corporation is provided to calculate all the following question. Most recent annual common dividend $4.00 Todays common stock price $50.00
The financial data for a corporation is provided to calculate all the following question.
Most recent annual common dividend $4.00
Todays common stock price $50.00
U.S. Treasury 10y annual rate 3 percent
Market risk premium 5 percent
Equity Risk Premium on Bond Yield 10 percent
Number of common shares outstanding 2.5 million
Todays preferred stock price $100.00
Fixed preferred dividend $8.00
Constant growth rate 6 percent
Beta 2.0
Floatation costs for Preferred stock issuance 7 percent
Market price of the bond $1,100.00
Annual coupon on the bond $70.00
Years to bond maturity 5 years
Par value bond $1,000
Number of preferred shares outstanding 200,000
Number of bonds outstanding 200,000
Income Statement (amounts in millions)
Sales $200,000
Variable operating costs (60% of sales) (120,000)
Gross profit 80,000
Fixed operating costs (40,000)
Net operating income (EBIT) 40,000
Interest expense (10,000)
Taxable income 30,000
Taxes (12,000)
Net income $18,000
Company can raise more debt by selling 50,000 new bonds at the same rate (interest) and receiving the market price of the bond i.e. $1,100. The outstanding 200,000 bonds and the additional 50,000 is the maximum the company can raise in debt. After this amount, the average after tax cost of debt will be increased by 1 percent.
In the upcoming annual financial results, the company expects to generate 75 million dollars in retained earnings for the capital budgeting projects. Any requirement of funds beyond this would require issuance of new stock at the market price of $50 per share while maintaining the existing capital structure.
Company has following projects for consideration
Projects Investment Expected MIRR
A $50 million 13 percent
B $60 million 10 percent
C $100 million 8 percent
D $10 million 7.5 percent
What is the proportion of debt to the overall capital?
The rate of return on companys equity using the Dividend Discount Model is:
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