Question
Trends Ltd has K200 million total net assets. It plans to increase its production machinery in 2012 by K50 million. Bond financing, at an interest
Trends Ltd has K200 million total net assets. It plans to increase its production machinery in 2012 by K50 million. Bond financing, at an interest rate of 12 percent, will sell at par. Preferred stock will have a 14 percent dividend payment and will be sold at a par value of K100. Common stock currently sells for K50 per share and can be sold to net K45. There is K10 million of internal funding available from retained earnings. Over the past few years, dividend yield has been 6 percent and the firms growth rate 8 percent. The tax rate is 35 percent. The present capital structure shown below is considered optimal. Debt; 8% coupon bonds K80,000,000 Preferred stock 20,000,000 Common stock (K10 par) 40,000,000 Retained earnings 60,000,000 Total claims K200,000,000 (a) How much of the K50 million must be financed by equity if the current capital structure must be maintained. (b) How much of the equity funding must come from the sale of new common stock? (c) What is Trends cost of new equity? (d) What is Trends WAC
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