What is the cost of reinvesting the retained earnings

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Reference no: EM133335768

Case Study: TBI has a target capital structure that consists of 30% debt, 50% common equity, and 20% preferred stock. The prevailing tax rate is 35 percent. The company has projects in which it would like to invest with costs that total P2,000,000. TBI has retained 50 percent of its net income of P1,500,000 this year after paying out the rest to investors in form of dividends. TBI is keen on reinvesting this portion of its earning to the prospective projects. The last dividend was P5, the current stock price is P50, and the growth rate of the company is 10%. If the company raises capital through a new equity issuance, the flotation costs are 10%. The cost of preferred stock is 9% and the after-tax cost of debt is 7%.

Questions:

1. What is the cost of reinvesting the retained earnings?
2. What is the cost of issuing new stocks? (%)
3. What is the weighted average cost of capital? (%)

Reference no: EM133335768

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