Question: CDE Inc.'s current (and optimal) capital structure is 40% debt, 10% preferred stock, and 50% common equity. CDE is in the 40% tax bracket. The

CDE Inc.'s current (and optimal) capital structure is 40% debt, 10% preferred stock, and 50% common equity. CDE is in the 40% tax bracket. The company can issue up to $20,000,000 in new bonds at par with a 7% coupon rate; any subsequent amount must carry a 2% premium to compensate investors for added risk. A new issue of preferred stock would pay an annual dividend of $4.00 and be priced to net the company $50.00 per share after the $3.00 per share floatation cost. The firm has $21,000,000 in change in retained earnings for the current period. CDE's common stock trades at $40.00 per share and the expected dividend on the common stock at t1 is 2.00. Floatation costs on a new common stock issue is $5.00 per share. The company is growing at 7% per year. If the firm has a capital budget of $55m, what is its marginal cost of capital?

A. 11.80%
B. 10.75%
C. 9.31%
D. 8.83%

Step by Step Solution

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock blur-text-image

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Students Have Also Explored These Related Finance Questions!

1.Beta Inc.'s current (and optimal) capital structure is 40% debt, 10% preferred stock, and 50% common equity.Beta is in the 40% tax bracket.The company can issue up to $20,000,000 in new bonds at...

Beta Inc.'s current (and optimal) capital structure is 40% debt, 10% preferred stock, and 50% common equity. Beta is in the 40% tax bracket. The company can issue up to $20,000,000 in new bonds at...

1.Beta Inc.'s current (and optimal) capital structure is 40% debt, 10% preferred stock, and 50% common equity.Beta is in the 40% tax bracket.The company can issue up to $20,000,000 in new bonds at...

DE Inc. ' s current ( and optimal ) capital structure is 4 0 % debt, 1 0 % preferred stock, and 5 0 % common equity. CDE is 1 can issue up to $ 2 0 , 0 0 0 , 0 0 0 in new bonds at par with a 7 %...

DE Inc. ' s current ( and optimal ) capital structure is 4 0 % debt, 1 0 % preferred stock, and 5 0 % common equity. CDE is can issue up to $ 2 0 , 0 0 0 , 0 0 0 in new bonds at par with a 7 % coupon...

SBP Inc.'s current (and optimal) capital structure is 40% debt, 10% preferred stock, and 50% common equity. SBP is in the 40% tax bracket. The company has a credit line with a bank up to $10,000,000...

1 0 . Ace Electronics Shipping ( NYSE: AES ) has an optimal capital structure of 4 0 % debt, 1 0 % preferred stock, and 5 0 % common equity. The before - tax cost of debt, the cost of preferred...

Feast Inc. plans to maintain its optimal capital structure of 40% debt, 10% preferred stock, and 50% common equity indefinitely. The pre-tax required return on each component source of capital is as...

Need help understanding these quick 1.) given the following information calculate the required return on this firm's securities: Beta is 0.9 risk free rate 5.94% Required return on the overall market...

DE Inc.'s current (and optimal) capital structure is 40% debt, 10% preferred stock, and 50% common equity. CDE is in the 40% tax bracket. The company can issue up to $20,000,000 in new bonds at par...

Solve the following PDES: i : u, = u, yy ii : u +9u = 0.

Calculating Break-Even in each of the following cases, calculate the accounting break-even and the cash break-even points. Ignore any tax effects in calculating the cash break-even. Unit Price Unit...

rnal versus External Financing 1 . Considering your family as the limiting boundary, what are examples of both internal and external financing options available to pay for you summer school tuition...

According to Texas insurance law , an emergency insurance agent's license may be issued for which of the following reasons ? A: So that an agent may complete pre - contract training before taking his...

B Who is responsible for developing a shared code when coaches and players speak different languages? How might the rules of communication be worked out between individuals who speak different...

Define goals in terms of problems to be solved (for example, Our goal is to raise $4,000 to beautify Dixon Park), not values to be embodied (Our goal is to be good citizens of this community)....

What group are you spending most of your time in these days? What type of communication network exists in the group? Is that network helping the group achieve its goals? If not, what changes might...