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The management of Jetson Company believes that the following capital structure is optimal:
Components
$ value
Bond, coupon 8% (now selling at $1075, has 14 years to the maturity and the face value of $1,000)
715,000
Preferred stock (dividend per share = $5.00)
249,000
Common stock
371,000
Retained Earnings
326,000
Total
1,661,000
Dividends on common stock are currently $3 per share, and they are expected to grow at a constant rate of 6 percent. The Jetson Company's common stock is currently selling at $40, and the preferred stock is selling at $50. The Flotation cost on new issues of common stock is 10 percent, and the interest on bonds is paid semi-annually. The return on the market portfolio is 12.1 percent, the risk-free rate is 3 percent, and the company's beta coefficient is 1.22. The company's tax rate is 40 percent.
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