The following table gives earnings per share figures for the Melbourne Shipping Company (MSC) during the preceding 10 years.The company's ordinary equity (7.8 million shares outstanding) is now selling for $65 per share, and the expected dividend at the end of the current year is 55 per cent of the EPS expected this year. Because investors expect past trends to continue, 'g'can be based on the earnings growth rate. (Note:that nine years of growth are reflected in the data.)

Year

EPS

Year

EPS

-10

$ 3.90

-5

$5.73

-9

4.21

-4

6.19

-8

4.55

-3

6.68

-7

4.91

-2

7.22

-6

5.31

-1

7.80

The current before-tax interest rate on debt is 9 per cent. The firm's marginal tax rate is 30 per cent. Its capital structure, considered to be optimal, is as follows:

Debt

$ 104,000,000

Common equity

$ 156,000,000

Total liabilities and equity

$ 260,000,000

REQUIRED

(a).Calculate 's' after-tax cost of new debt and of ordinary equity, assuming that new equity comes only from retained earnings. Calculate the cost of equity as r_s=/P₀+ g.

(b). Find Brueggeman's WACC. Assume that no new ordinary shares are sold and that all debt costs 9 per cent.

(c).How much can be spent on capital investments before external equity must be sold? (Assume that retained earnings available for the current year are 45 per cent of the current year's earnings. Obtain the current year's earnings by multiplying the EPS expected in the current year by the shares outstanding.)

(d).What is Brueggeman's WACC (cost of funds raised in excess of the amount calculated in part c) if new ordinary shares can be sold to the public at $65 a share to net the company $58.50 a share? The cost of debt is constant.