Danielle & Company Limited (DCL), based in Portland, has the following capital structure: debt is 41%,...

 

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Danielle & Company Limited (DCL), based in Portland, has the following capital structure: debt is 41%, preferred stock is 28% and common stock is 31%. Their tax rate is 25% and investors expect earnings to grow at a constant rate of 4.5% into the future. DCL is expected to pay a dividend of $5.50 per share and the stock currently sells for $46 per share. The following terms apply to new security offerings: Preferred: New preferred stock can be sold to the public at a price of $52.50 per share, with a dividend of $7.00, and would incur a flotation cost of 8%. Debt: DCL lenders require a return of 14% per annum. Common: Common stock will only be raised via retained earnings. (i) Calculate the cost of each capital structure component (9 marks) (ii) Determine the weighted average cost of capital for DCL. (6 marks) b) Explain how the cost of capital would be impacted by each of the following: (i) increasing the proportion of common equity and reducing the proportion of debt. (2 marks) (ii) an increase in the tax rate. (2 marks) Danielle & Company Limited (DCL), based in Portland, has the following capital structure: debt is 41%, preferred stock is 28% and common stock is 31%. Their tax rate is 25% and investors expect earnings to grow at a constant rate of 4.5% into the future. DCL is expected to pay a dividend of $5.50 per share and the stock currently sells for $46 per share. The following terms apply to new security offerings: Preferred: New preferred stock can be sold to the public at a price of $52.50 per share, with a dividend of $7.00, and would incur a flotation cost of 8%. Debt: DCL lenders require a return of 14% per annum. Common: Common stock will only be raised via retained earnings. (i) Calculate the cost of each capital structure component (9 marks) (ii) Determine the weighted average cost of capital for DCL. (6 marks) b) Explain how the cost of capital would be impacted by each of the following: (i) increasing the proportion of common equity and reducing the proportion of debt. (2 marks) (ii) an increase in the tax rate. (2 marks)

Answer rating: 100% (QA)

Part a i Cost of Preferred Stock The cost of preferred stock can be calculated using its required rate of return given that preferred stocks have no m... View the full answer