Determine the cost of each capital component

Assignment Help Financial Management

Reference no: EM132011649

1. Karla Engineering Inc. (KEI) has the following capital structure, which it considers to be optimal:

Debt 25%

Preferred stock 15%

Common equity 60%

KEI's expected net income this year is $34,285.72; its established dividend payout ratio is 40%; its federal-plus-state tax rate is 35%; and investors expect future earnings and dividends to grow at a constant rate of 9%. KEI paid a dividend of $3.20 per share last year, and its stock currently sells for $54.00 per share. KEI can obtain new capital in the following ways:

• Preferred: New preferred stock with a dividend of $10.00 can be sold to the public at a price of $95.00 per share.

• Debt: Debt can be sold at an interest rate of 12%

a. Determine the cost of each capital component.

b. Calculate the WACC.

c. KEI has the following investment opportunities that are average-risk projects:

Project Cost at t = 0 Rate of Return

A $ 10,000 17.4%

B 20,000 16.0

C 10,000 14.2

D 20,000 13.7

E 10,000 12.0

Which projects should KEI accept? Why? Assume that KEI does not want to issue any new common stock.

Reference no: EM132011649

Questions Cloud

What is the bond nominal yield to call : What is the bond’s nominal yield to call? What is the firm’s expected rate of return?

Discount rate in company and project valuations : What is the cost of capital to be used as a discount rate in company and project valuations?

What is the future value of the same annuity due : If the future value of an ordinary, 7-year annuity is $9,600 and interest rates are 9.0 percent, what’s the future value of the same annuity due?

The present value of the stream of savings estimates : The present value of the stream of savings estimates is?

Determine the cost of each capital component : KEI's expected net income this year is $34,285.72; its established dividend payout ratio is 40%. Determine cost of each capital component. Calculate the WACC.

Consider for examining if his decisions are ethical : What are the ways that Gordon should consider for examining if his decisions are ethical?

What is the stock expected price four years from today : It should continue to grow at a constant rate of 10% a year. If its required return is 14%, what is the stock's expected price 4 years from today?

Your client once he starts to withdraw the money : how many months will it last your client once he starts to withdraw the money

Forward rate agreements and short-term interest rate futures : Compare the advantages and disadvantages of using forward rate agreements (FRAs) and short-term interest rate futures contracts to manage interest-rate risk.

User Account

All Pages