Flotation cost on preferred stock

Assignment Help Financial Management

Reference no: EM131070702

A company has a capital structure of 45% debt, 5% preferred stock and 50% common equity.

(a) The company can obtain unlimited debt at an interest rate of 10%. The marginal tax rate is 35%. Find the after-tax cost of debt.

(b) Preferred stock carries a dividend of $14 and currently sells for $120.00. Flotation cost on preferred stock is $10 per share. What is the cost of preferred stock?

(c) Their current stock price is $25. The next dividend is expected to be $2.56 and growth is constant at 8%. If new common stock is issued, it will have a flotation cost of 10%. Find the cost of retained earnings and the cost of issuing new common shares.

(d) If the net income is expected to be $1,600,000, and the company’s policy is to pay 50% of net income for dividends, what is the break point caused by using all of retained earnings?

(e) Find the WACC using retained earnings and the WACC when new equity is issued.

Reference no: EM131070702

Questions Cloud

The inverse of a spread is called reverse spread : An investor believes that there will be a big jump in a stock price, but is uncertain as to the direction. Identify six different strategies (spreads or combinations) the investor can follow and explain the differences among them. You should also con..

What is its weighted average cost of capital : A company has $1 million in debt and $2 million in equity. The interest rate on its debt is 5%, and the required rate of return on its equity is 15%. Its effective tax rate is 30%. What is its weighted average cost of capital (WACC)?

Portfolio expected return-variance and standard deviation : Consider the following information on a portfolio of three stocks: State of Economy Probability of State of Economy Stock A Rate of Return Stock B Rate of Return Stock C Rate of Return Boom .12 .09 .34 .53 Normal .53 .17 .19 .27 Bust .35 .18 –.18 –.3..

Goal is to create portfolio with expected return : You have $18,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 16 percent and Stock Y with an expected return of 11 percent. Assume your goal is to create a portfolio with an expected return of 12.10 percent. Req..

Flotation cost on preferred stock : A company has a capital structure of 45% debt, 5% preferred stock and 50% common equity. The company can obtain unlimited debt at an interest rate of 10%. The marginal tax rate is 35%. Find the after-tax cost of debt. Preferred stock carries a divide..

Cost data concerning the widget machine : The PARC Company, a large profitable corporation, has decided to purchase a new widget machine. The following cost data concerning the widget machine have been provided. First cost = $3,156,000. Salvage value = $119,000. Life = 10 Years. Direct purch..

Evaluating extra dividend versus share repurchase : Flashback Corporation is evaluating an extra dividend versus a share repurchase. In either case, $32,500 would be spent. Current earnings are $2.90 per share, and the stock currently sells for $81 per share. There are 5,000 shares outstanding. Ignore..

What is the company optimal capital budget : A company has a WACC1=12.5% for funding up to $4 million when retained earnings are used. They also have a WACC2=13.7% for funding above $4 million when new equity is raised. If they have the following independent investment opportunities, which proj..

Botanist has produced a new variety of hybrid wheat : A botanist has produced a new variety of hybrid wheat that is better able to withstand drought than other varieties. The botanist knows that for the parent plants, the proportion of seeds germinating is 80%. The proportion of seeds germinating for th..

User Account

All Pages