Cost of Capital - Solutions9

Cost of Capital - Solutions9 - * C. D. E. $1,625,000 $...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Old Exam Questions - Cost of Capital - Solutions Page 28 of 42 Pages * C. $1,625,000 D. $ 850,000 E. $1,950,000 K D = (8.0%)(1-.4) = 4.8% K S = [$2.45 / $35.00] + 6.0% = 13.0% K e = [$2.45 / ($35.00)(1 - .125)] + 6.0% = 14.0% Firm will switch from K S to K e when the capital budget hits $350,000 / .70 = $500,000 Below $500,000: WACC = (4.8%)(.30) + (13.0%)(.70) = 1.44% + 9.10% = 10.54% Above $500,000: WACC = (4.8%)(.30) + (14.0%)(.70) = 1.44% + 9.80% = 11.24% Therefore, the firm should take on Projects A-D and the size of the optimal capital budget should be $1,625,000. 38. An analyst has collected the following information regarding your company: The company’s capital structure is 75 percent equity, 25 percent debt. The before-tax yield to maturity on the company’s bonds is 8 percent and the bonds are selling at par value. The company’s dividend next year is forecasted to be $1.25 a share. The company expects that its dividend will grow at a constant rate of 6 percent a year. The company’s stock price is $20. The company’s tax rate is 40 percent. The company anticipates that it will need to raise new common stock this year. Its investment bankers anticipate that the total flotation cost will equal 12.5
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 3

Cost of Capital - Solutions9 - * C. D. E. $1,625,000 $...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online