The management of a conservative firm has adopted a policy

The management of a conservative firm has adopted a policy of never letting debt exceed 30 percent of total financing. The firm will earn $10,000,000 but distribute 40 percent in dividends, so the firm will have $6,000,000 to add to retained earnings. Currently the price of the stock is $50; the company pays a $2 per share dividend, which is expected to grow annually at 10 percent. If the company sells new shares, the net to the company will be $48. Given this information, what is the
a. cost of retained earnings;
b. cost of new common stock?
The rate of interest on the firm’s long-term debt is 10 percent and the firm is in the 32 percent income tax bracket. If the firm issues more than $2,400,000, the interest rate will rise to 11 percent. Given this information, what is the
c. cost of debt;
cost of debt in excess of $2,400,000?
The firm raises funds in increments of $3,000,000 consisting of $900,000 in debt and $2,100,000 in equity. This strategy maintains the capital structure of 30 percent debt and 70 percent equity. Develop the marginal cost of capital schedule through $12,000,000. What impact would each of the following have on the marginal cost of capital schedule?
e. the firm’s income tax rate increases
f. the firm retains all of its earnings and the price of the stock is unaffected
g. $12,000,000 is insufficient to meet attractive investment opportunities
Capital Structure
Capital structure refers to a company’s outstanding debt and equity. The capital structure is the particular combination of debt and equity used by a finance its overall operations and growth. Capital structure maximizes the market value of a...
Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...
Cost Of Debt
The cost of debt is the effective interest rate a company pays on its debts. It’s the cost of debt, such as bonds and loans, among others. The cost of debt often refers to before-tax cost of debt, which is the company's cost of debt before taking...


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