After tax cost for each of the capital components

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Reference no: EM131934608

Best Dairy (“BD”), Inc.is constructing its cost of capital. Its target capital structure is 30 percent debt and 70 percent common equity. It can raise up to $15.0 million in bank loans at a before tax cost of 10% but any debt beyond $15.0 million will have a higher cost at 13% before tax. BD is a constant growth firm that just paid a common stock dividend of $3.40, the common stock currently sells for $50.00 per share and has a constant growth rate of 6 percent. The firm's available retained earnings are expected to be $9 million. Flotation costs on new common stock total $3.00 per share. The new shares of common stock will have to be underpriced by $2.50 per share to sell. The firm's marginal tax rate is 40 percent. a. Calculate the after tax cost for each of the capital components. b. Calculate all Breakpoints. c. Draw the graph, label all elements (i.e., label each tier, the breakpoints, etc.) d. Calculate the weighted cost of capital for each tier of financing.

Reference no: EM131934608

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