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.

  • CreatedDecember 03, 2014
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