Explain what the capital structure of a company is

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Problem 1: Explain what the capital structure of a company is.

Problem 2: List the sources of long-term financing used by companies to finance investment capital, in order from lowest to highest cost, and explain what is the factor that causes one source of capital to be more or less expensive than the other sources.

Problem 3: Using the cost of debt approximation formula, determine the pretax cost for a bond that sells for $925 off par and pays a coupon of $85 for 20 years. Issue costs (flotation costs) are $5 per bond. You must show the computations to receive points for your answer.

Problem 4: For the case in problem 3, calculate the after-tax cost of debt if the company's tax liability is 40%. You must show the computations to receive points for your answer.

Problem 5: Consider issuing preferred stock with an annual dividend of $12.00 per preferred share. These shares will sell for $100 each. The issue cost (flotation cost) is $8 per share. Calculate the preferred cost of capital. You must show the computations to receive points for your answer.

Problem 6: DupT Corporation plans to make a common stock issue to finance its next capital investment project. The market price of the corporation's stock is $75 per share. A dividend of $5 per share is expected to be paid at the end of the year. The corporation has had an average annual growth of 6%. The issue cost is $2.50 per share. Determine the cost of equity capital using Gordon's constant growth method (Gordon Growth Model). You will need to show the computations to receive credit for your answer.

Reference no: EM133331714

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