Reference no: EM131043937
The Morris Company is attempting to determine its cost of capital in order to evaluate several proposed capital projects and set its capital budget for next year. The following information has been made available:
• Target capital structure is 40% debt, 60% common stock equity
• $10 million can be borrowed at a pre-tax cost of 11%
• Additional debt will cost 14% (pre-tax) but is unlimited
• $7,500,000 of retained earnings will be generated next year
• Additional common equity will be raised through issuing new common stock (no limit foreseen)
• Morris stock currently sells for $12.00 per share
• Last year's dividend was $1.20
• Dividends are expected to grow 4% annually
• New common stock will be sold for $11.00 per share and flotation costs will be $1.00 per share
• Morris is in the 40% tax bracket
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