Page 37

Long-term debt: The firm can raise $700,000 of additional debt by selling 10-year, $1,000, 12% annual interest rate bonds to net $970 after flotation costs. Any debt in excess of $700,000 will have a before-tax cost, rd, of 18%. Preferred stock: Preferred stock, regardless of the amount sold, can be issued with a $60 par value and a 17% annual dividend rate. It will net $57 per share after flotation costs. Common stock equity: The firm expects its dividends and earnings to continue to grow at a constant rate of 15% per year. The firm’s stock is currently selling for $20 per share. The firm expects to have $1,300,000 of available retained earnings. Once the retained earnings have been exhausted, the firm can raise additional funds by selling new common stock, netting $16 per share after underpricing and flotation costs.

TO DO: a. Over the relevant ranges noted in the following table, calculate the after-tax cost of each source of financing needed to complete the table. Source of capital Range of new financing (%) Long-term debt $0–$700,000 $700,000 and above _________ Preferred stock $0 and above _________ Common stock equity $0–$1,300,000 _________ $1,300,000 and above _________

After-tax cost _________

*******************************************************

Profile for rabindra20

FIN 486 Education Organization - snaptutorial.com  

For more classes visit www.snaptutorial.com FIN 486 Week 1 Assignment Part 3 JJ’s Jammers Summary FIN 486 Week 1 Assignment Part 1 Financi...

FIN 486 Education Organization - snaptutorial.com  

For more classes visit www.snaptutorial.com FIN 486 Week 1 Assignment Part 3 JJ’s Jammers Summary FIN 486 Week 1 Assignment Part 1 Financi...

Advertisement