5. J. Ross and Sons Inc. have a target capital structure that calls for 40 percent...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
5. J. Ross and Sons Inc. have a target capital structure that calls for 40 percent debt, 10 percent preferred stock, and 50 percent common equity. The firm's current after-tax cost of debt is 6 percent, and it can sell as much debt as it wishes at this rate. The firm's preferred stock currently sells for $90 a share and pays a dividend of $10 per share; however, the firm will have to incur a flotation cost of $10 per share from the sale of new preferred stock. Ross' common stock currently sells for $40 per share, but the firm will net only $34 per share from the sale of new common stock. The $6 difference represent the underpricing necessary in the competitive capital market The firm recently paid a dividend of $2 per share on its common stock, and investors expect the dividend to grow indefinitely at a constant rate of 10 percent per year. Assume the firm has sufficient retained earnings to fund the equity portion of its capital budget. What is the firm's cost of retained earnings? ) b) What is the firm's cost of newly issued common stock? What is the firm's cost of newly issued preferred stock? What is the firm's weighted average cost of capital? 5. J. Ross and Sons Inc. have a target capital structure that calls for 40 percent debt, 10 percent preferred stock, and 50 percent common equity. The firm's current after-tax cost of debt is 6 percent, and it can sell as much debt as it wishes at this rate. The firm's preferred stock currently sells for $90 a share and pays a dividend of $10 per share; however, the firm will have to incur a flotation cost of $10 per share from the sale of new preferred stock. Ross' common stock currently sells for $40 per share, but the firm will net only $34 per share from the sale of new common stock. The $6 difference represent the underpricing necessary in the competitive capital market The firm recently paid a dividend of $2 per share on its common stock, and investors expect the dividend to grow indefinitely at a constant rate of 10 percent per year. Assume the firm has sufficient retained earnings to fund the equity portion of its capital budget. What is the firm's cost of retained earnings? ) b) What is the firm's cost of newly issued common stock? What is the firm's cost of newly issued preferred stock? What is the firm's weighted average cost of capital?
Expert Answer:
Answer rating: 100% (QA)
SOLUTION To calculate the firms cost of capital we need to find the cost of each component of capita... View the full answer
Related Book For
Posted Date:
Students also viewed these finance questions
-
Sheehan Corp. is forecasting an EPS of $3.00 for the coming year on its 500,000 outstanding shares of stock. Its capital budget is forecasted at $800,000, and it is committed to maintaining a $2.00...
-
Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...
-
The McGee Corporation finds it is necessary to determine its marginal cost of capital. McGees current capital structure calls for 40 percent debt, 30 percent preferred stock, and 30 percent common...
-
An airplane has a mass of 5000 kg, a maximum thrust of 7000 N, and a rectangular wing with aspect ratio 6.0. It takes off at sea level with a 60 split flap as in Fig. 7.25. Assume all lift and drag...
-
A transmission tower is held by three guy wires attached to a pin at A and anchored by bolts at B, C, and D. If the tension in wire AC is 2.6 kN, determine the vertical force P exerted by the tower...
-
In what way did the Rusch Factors case change the relationship between auditors and third parties insofar as ordinary negligence under common law is concerned?
-
Selected accounts of Albright Consulting, Inc., a financial services business, have the following balances at January 31,2010, the end of its first year of operations. During the year, Lilly...
-
Renuka Jains Car Wash takes a constant time of 4.5 minutes in its automated car wash cycle. Autos arrive following a Poisson distribution at the rate of 10 per hour. Renuka wants to know: a) The...
-
Problem 3-7 Sustainable Growth Assume the following ratios are constant: Total asset 2.60 turnover Profit margin 6.6% Equity multiplier 1.50 Payout ratio 25% What is the sustainable growth rate? (Do...
-
what Maxim was applied to reduce the tax, Generate income in a lower tax rate entity - tax costs decrease what doctrine the court referenced to deny the tax strategy, and the Internal Revenue Code...
-
Online presentations address all of these general speech purposes EXCEPT: to inform. to persuade. O to address a special occasion. to utilize technology.
-
Royal Lawncare Company produces and sells two packaged products-Weedban and Greengrow. Revenue and cost information relating to the products follow. Selling price per unit Variable expenses per unit...
-
Trend and Seasonality Question (A) Given the actual demand for years 2003/4, calculate the forecast for year 2005 for each quarter and for the total year. For your calculations use the principles of...
-
Summary: Texas Paint & Coatings (TPC) is a producer of specialty paints and coatings for industrial and agricultural equipment manufacturers. Currently, TPC is in the process of introducing a new...
-
Ricky's Piano Rebuilding Company has been operating for one year. On January 1, at the start of its second year, its income statement accounts had zero balances and its balance sheet account balances...
-
You are once more the CEO of Compliant Hospital facing yet another dilemma. Under your leadership, Compliant Hospital adopted a policy to limit the removal of PHI from the hospital. The policy states...
-
On 1 July 2018, Parent Ltd acquired all the shares of Son Ltd, on a cum-div. basis, for $2,057,000. At this date, the equity of Son Ltd consisted of: $ 1,000,000 Share capital 500 000 shares...
-
What are the major uses of market indexes?
-
Financial ratio analysis is conducted by four types of analysts: managers, equity investors, long-term creditors, and short-term creditors. What is the primary emphasis of each of these groups in...
-
As investment manager of Pasco Electric Companys pension plan (which is exempt from income taxes), you must choose between IBM bonds and AT&T preferred stock. The bonds have a $1,000 par value,...
-
Alpha Graphics completed in the following transactions during September: Requirements Journalize the preceding transactions on the books of Alpha Graphics. Sept. 2 Purchased inventory for cash, $740....
-
Refer to the data in Problem 5-34A. 1. Journalize Harley's adjusting and closing entries. 2. Determine the December 31, 2009, balance of J. Harley, Capital. Problem 5-34A Harley's of Chicago's trial...
-
The adjusted trial balance of Arctic Cat RVs at December 31, 2009, follows. Requirements 1. Journalize Arctic Cat's closing entries. 2. Compute the gross profit percentage and the rate of inventory...
Study smarter with the SolutionInn App