A company has an optimal capital structure as follows: Total Assets $600,000 Debt $300,000 Preferred Stock $100,000 Common Equity $200,000 What would be the minimum expected return from a new capital investment project to satisfy the suppliers of the capital? Assume the applicable tax rate is 40 percent, YTM of its debt is 11 percent, flotation cost per share of preferred stock is $0.75, and flotation cost per share of common stock is $4. The preferred and common stocks are selling in the market for $26 and $143 a share, respectively, and they are expected to pay a dividend of $2 and $7, respectively, in one year. The company’s dividends are expected to grow at 13 percent per year. The firm would like to maintain the foregoing optimal capital structure to finance the new project.

A company has a capital structure as follows:

Total Assets……………………………………..$6,00,000

Debt………………………………………………..$3,00,000

Preferred Stock………………………………$1,00,000

Common Equity………………………………$2,00,000

What would be the minimum expected return from a new capital investment project to satisfy the suppliers of the capital?

Assume the applicable tax rate is 40%, interest on debt is 11%, flotation cost per share of preferred stock is $0.75, and flotation cost per share of common stock is $4. The preferred and common stocks are selling in the market for $26 and $143 a share respectively, and they are expected to pay a dividend of $2 and $7, repectively, in one year. The company's dividends are expected to grow at 13% per year. The firm would like to maintain the existing capital structure to finance the new project.

Answer rating: 100% (QA)

Optimal ... View the full answer