Question
The Jenny Inc. stock sells for $50, and last years dividend was $2.10. Jenny also has $100 par preferred stock with a 3.30% dividend, and
The Jenny Inc. stock sells for $50, and last years dividend was $2.10. Jenny also has $100 par preferred stock with a 3.30% dividend, and new preferred stock could be sold at a price of $31.25 per share, with a flotation cost of 4%. It is projected that the common stock dividend will grow at 7% a year. The firm can issue new 10 year at par bonds with coupon rate of 10%, and its marginal tax rate is 35%. The market risk premium is 6%, the risk-free rate is 6.5%, and Jenny beta is 0.83. Jenny's balance sheet shows $600 million in debt, $100 mil-lion in preferred stock, and $500 million in total common equity. However, its target capital structure is 45% debt, 5% preferred stock, and 50% common equity.
*** Please prepare your Excel Sheets in way that it starts with the inputs used in the model.
Part 1: Calculate the after-tax cost of debt. [2 points]
Part 2: Calculate the cost of preferred stock. [2 points]
Part 3: Calculate the cost of equity, using the dividend growth approach. [2 points]
Part 4: Calculate the cost of equity, using CAPM. [2 points]
Part 5: Comparing your answers to Part 3 and Part 4, what is your final decision for the cost of equity. Please explain. [1 point]
Part 6: List the capital structure weights to be included in the WACC calculation. [2 points]
Part 7: Calculate the companys WACC? [2 points]
Part 8: If Jenny is evaluating a project with an expected return of 9%, should the project should be accepted or rejected. Please explain. [2 points]
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started