A company has the following optimal capital structure (in %):

Debt capital 25

Preferred shares 15

Share capital (common shares + retained earnings) 60

Total 100

This year net income of this comany is expected to be equal to $17 142,86; dividend payout ratio will be 30 %; taxation rate is 40 %. Investors expect revenues and dividends to grow with 9% growth rate each year in the future. At the end of the last year a company paid dividend of $3,60 per share; today the current share price is $60. Return on Treasury bills is 11%, the average market return is 14%, beta-ratio is 1,51. To accumulate additional capital this company has the following opportunities:

Common shares: the costs of issuing new shares will be equal to 10%.

Preferred share: new preferred shares can be sold at $100 per share with $11 dividend.

Debt capital: new bonds can be issued, the cost of debt capital will be equal to 12%.

A. How much capital can the company accumulate without issuing new shares?

В. What is the WACC ofthe company when it uses only retained earnings? What is the WACC of the company when it starts to issue new common shares?

C. Draw MCC line for the company.

Answer rating: 100% (QA)

A To calculate the capital the company can accumulate without issuing new shares we need to determine the retained earnings and the dividend payment Given Net income 1714286 Dividend payout ratio 30 D... View the full answer