Peritas Inc. is offering $6 for its next dividend, its common stock price is $80 and its average annual growth rate is estimated at 10% for the future. Additional information is provided as follows: the cost of issuing and purchasing new common stock is 12% of the stock price the yield to maturity of the debt is 14% and the issue and underwriting costs are 6% of the face value of the bond; the preferred shares have a market yield of 15% and the brokerage fees are 10% of their market value of $40; the corporate income tax rate is 40%; Peritas' optimal financing structure is as follows: debt (bonds) represents 30% of total financing, preferred shares 10% and net worth 60%; The firm plans to generate $100 million in net income in 1992. This amount will be allocated as follows: 40 million will be paid in dividends; 60 million will be reinvested in the firm.

 You are asked to: (a) calculate the marginal cost of capital to the extent that the reinvested earnings in 1992 are sufficient on the net worth side to finance the firm's new projects; also calculate in a first step the total amount of new capital that can be raised on the basis of the reinvested earnings for the year as well as determine its allocation;

 

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Solution The marginal cost of capital MCC is the cost to a company to issue an additional unit of ca... View the full answer