CBmE+195+-+Chemical+Engineering+Economics+-+Problem+Set+_5+-+Fall+2010

CBmE+195+-+Chemical+Engineering+Economics+-+Problem+Set+_5+-+Fall+2010

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University of California at Berkeley Department of Chemical and Biomolecular Engineering Chemical and Biomolecular Engineering 195 Special Topics – Chemical Engineering Economics Fall 2010 PROBLEM SET #5 – Due November 2, 2010 at the start of class 18. ABCD Company’s management has settled on what it considers to be the “optimal” capital structure for the company. The following information may be relevant: (i) ABCD Company’s capital structure is Securities Book Value Market Value Short-term debt trivial trivial Long-term debt $3 million $3 million Preferred stock $2 million $2 million Paid-in common stock $2 million \ Retained earnings $3 million / $7 million (ii) New debt securities can be sold in the market at an effective rate of interest (before taxes) of 12%. The company’s income tax rate is 40%. An issue of the firm’s preferred stock paying an annual dividend of $4 per share could be placed in the market at $50 per share. As you know, flotation costs for bonds and preferred stocks are usually small; and you can assume that they can be neglected here. (iii) Earnings per share one year hence are expected to be $10, of which 60% are expected to be paid out in common stock dividends. One year from today, the effective annual growth
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CBmE+195+-+Chemical+Engineering+Economics+-+Problem+Set+_5+-+Fall+2010

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