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Assume Eternalife Company has the following capital structure, which it considers to be optimal: debt 30%, preferred stock 20%, and common stock 50%. The company's tax rate is 30%. Investors expect earnings and dividends to grow at a constant rate of 10% in the future. Eternalife Company paid a dividend of Br. 4.50 per share last year and its stock currently sells at a price of Br. 50 per share. Five-year treasury bonds yield 5%, the market risk premium is 4%, and Eternalife beta is 1.2. The following terms would apply to new security offerings.
Common Stock: New common equity will be raised only by retaining earnings.
Preferred stock: New preferred stock could be sold to the public at a price of Br.100 per share, with a dividend of Br.10, and floatation costs of Br.5 would be incurred.
Debt (bond): Debt could be sold at an interest rate of 10%.
Required:
Problem i) Find the component costs of debt, preferred stock and common stock
Problem ii) Determine the Weighted average cost of capital (WACC) of the company.
Norton Co. purchased the following portfolio of securities during 2014 and reported the following balances at December 31, 2014. No sales occurred during 2014. What amount should Norton Co. report on its income statement related to these securities?
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Manuel Juarez runs a surfing school on the North Shore of Oahu. He has two inputs: surfboards, which he rents from a local shop for $15 per day, and surfing instructors, whom he hires for $50 per day. Manuel will optimize his input combination if he ..
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