How much of this will be debt and equity

Assignment Help Finance Basics

Reference no: EM13268940

Saven Travel Corporation is considering several investment opportunities in order to diversify its operations. Mr. Saven, president, is trying to determine the firm's cost of capital before he makes a decision. This diversification plan will require the firm to raise $400 million. A share of common stock is currently selling for $50, and the amount of the last dividend paid was $1.25. The company's earnings and dividends have been growing at about 12%, however, this is expected to drop to 9% per year in the future. Flotation costs of new common will be $4.00 per share. The firm can raise $150 million internally through retained earnings. The firm's investment dealer has informed Mr. Saven that this amount of equity can support $100 million in 12% coupon bonds. The company's tax rate is 46%.

A) Compute the weighted average cost of capital on the first $250 million of funds.

B) Saven Travel will need to raise $150 of additional capital for expansion. How much of this will be debt and equity?

C) Compute the marginal cost of capital on the additional $150 million assuming the cost of debt stays the same.

Reference no: EM13268940

Questions Cloud

What is the firm cost of preferred stock : A company's perpetual preferred stock currently sells for $92.50 per share, and it pays an $8.00 annual dividend. If the company were to sell a new preferred issue, it would incur a flotation cost of 5.00% of the issue price. What is the firm's co..

How much rachel take as a miscellaneous itemized deduction : How much can rachel take as a miscellaneous itemized deduction subject to the 2 percent floor?

Which strategy works best if a bidding war erupts : If you were Smith's financial advisor, which strategy would you advise he establish? Or would you argue that he not speculate on this takeover?

Wheat is dependent on number of inherited pigment genes : Kernal color in wheat is dependent on the number of inherited pigment genes that are additive in their effects. If an uppercase letter contributes pigment but a lowercase does not, what color of wheat kernels would be expected in the progeny when a p..

How much of this will be debt and equity : Compute the marginal cost of capital on the additional $150 million assuming the cost of debt stays the same.

Determine the heat flow down the rod : An iron bar 40 cm long is braised to a copper bar 50 cm long and of the same diameter. What is the heat flow down the rod if its cross-sectional area is 2.50 cm2

What is the projected operating cash flow for this project : The fixed costs for this project are $42,000, depreciation is $11,000 a year, and the tax rate is 33 percent. What is the projected operating cash flow for this project?

Suppose length of cucumbers has narrow sense heritability : Suppose the length of cucumbers has narrow sense heritability (h2) of 0.70. A population produces cucumbers that have an average length of 28 cm, and from this population a breeder selects a plant producing 35-cm long cucumbers to cross by self-ferti..

Find the total momentum of the two protons in the laboratory : Two protons, each having a speed of 0.940c in the laboratory, are moving toward each other. find the total momentum of the two protons in the laboratory

User Account

All Pages