Alpha Products maintains a capital structure of 40 percent debt and 60 percent common equity. To finance
Question:
Alpha Products maintains a capital structure of 40 percent debt and 60 percent common equity. To finance its capital budget for next year, the firm will sell $50 million of 11 percent bonds at par value (assume no flotation costs). The firm will finance the rest of its $125 million in capital expenditures with retained earnings. Next year, Alpha expects net income to grow 7 percent to $140 million, and dividends also are expected to increase 7 percent to $1.40 per share and to continue growing at that rate for the foreseeable future. The current market value of Alpha's common stock is $30 per share. If the firm has a tax rate of 21 percent, what is its weighted cost of capital for next year?
Foundations of Finance The Logic and Practice of Financial Management
ISBN: 978-0132994873
8th edition
Authors: Arthur J. Keown, John D. Martin, J. William Petty