Question: The CEO of an electronics business was contemplating going public

The CEO of an electronics business was contemplating going public. Assume that the prospectus shows an expansion plan that would cost $20 million, and the CEO wants to raise funds from the following sources:
a) $8 million from common shares. Each share would be sold for $15 and yield $2 in dividends. The flotation costs would be 10%.
b) $1 million through the company’s retained earnings.
c) $1 million from preferred shares. The expected selling price would be $10, and the flotation costs would be $0.50 per share. Annual dividends of $1 per share would be paid to the preferred shareholders.
d) $8 million from a mortgage at a cost of 5%.
e) $2 million from a second mortgage at a cost of 7%.
The corporate tax rate is 48%, and the prospectus showed the growth rate to be 5% per year.
Calculate the company’s cost of capital.

Calculate the company’s cost of capital.




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  • CreatedDecember 03, 2014
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