Question
Zinger Corporation needs to expand its facilities. The firm's optimum capital structure has traditionally been 40 percent debt, 10 percent preferred stock, and 50 percent
Zinger Corporation needs to expand its facilities. The firm's optimum capital structure has traditionally been 40 percent debt, 10 percent preferred stock, and 50 percent equity. The company will try to maintain this capital structure in financing this expansion plan without the need for external common share financing. Currently Zinger's common stock is traded at a price of $20.00 per share. Last year's dividend was $2.00 per share. The share dividend has been growing at 8 percent and is expected to continue to grow at 8 percent into the future. The company's preferred stock is selling at $60.00 per share and has been yielding 6 percent in the current market. Zinger Corp. has bonds outstanding with a coupon rate of 12 percent, but its investment dealer has informed the company that the current yield to maturity for bonds of equal risk is currently 10 percent. Flotation costs have been estimated at 4 percent for both common stock and preferred stock. The flotation cost for debt is 5 percent. Zinger's tax rate is 30 percent. Required: Complete the following table: Cost (aftertax) Weights Weighted Cost Debt (Kd) 4.20 % 40 % % Preferred stock (Kp) 10 % Common equity (Ke) (retained earnings) 50 % Weighted average cost of capital (Ka) %
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored 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