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Calculate the cost of new common stock

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Reference no: EM131888341

Tex-Mex by Rex, Inc. is planning its yearly budget and has the following potential independent proposals:

                                    PROJECT                   OUTLAY                 IRR

                                    A                                 $5,000,000                  11.0%

                                    B                                 $5,000,000                  18.0%

                                    C                                 $8,000,000                  16.0%

                                    D                               $12,000,000                10.5%

                                    E                                 $12,000,000                12.0%

The firm’s capital structure shown below is considered optimal and will be maintained:

                                    Debt                            $80,000,000

                                    Preferred Stock           $20,000,000

                                    Common Equity         $100,000,000

The firm has a marginal tax rate of 35% and has $5,000,000 of retained earnings available for investment. Four years ago, Tex-Mex by Rex, Inc. paid a common stock dividend of $3.75 a share. Yesterday, they paid a dividend of $5.00. Assume that this dividend growth rate continues for the indefinite future. The market price for its common stock is $82 with a beta of 1.25. Currently, the YTM on T-Bonds is 2% and the expected market return is 10%. Tex-Mex by Rex, Inc. can raise funds under the following limitations:

BONDS: New 20-year $1000 par value bonds carrying a coupon of 12% (annual) are priced to yield the investor 10% a year. Flotation costs total $70.27 per bond.

PREFERRED STOCK: Current shares of preferred stock have a dividend of $3.50 and are selling for $50 per share. Underwriters charge a flotation fee of 12% of the selling price.

COMMON STOCK: New common stock requires flotation costs equal to 13% of the stock’s price.

Calculate the Cost of New Common Stock.

Reference no: EM131888341

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