Cost of Capital 7 - of new financing are estimated to be:...

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Old Exam Questions - Cost of Capital Page 7 of 27 Pages A. 5.35% B. 5.50% C. 5.65% D. 5.80% E. 5.95% YOU ARE GIVEN THE FOLLOWING INFORMATION FOR PROBLEMS 4 - 5: Your company's current market-valued capital structure, which is considered to be optimal, is shown below: Debt 40% Preferred Stock 10% Equity 50% In order to meet their expansion plans for next year, the company has decided to raise $5,000,000. Net Income is expected to be $550,000 next year. However, preferred stock dividends are expected to account for $50,000 of this profit. The common stock dividend payout rate is 40% of the profit after the payment of preferred dividends. The corporate tax rate is equal to 40%, and the before-tax costs
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Unformatted text preview: of new financing are estimated to be: Debt: 5% for the first $500,000 of new debt. 6% for up to an additional $1,000,000 of new debt. 7% for up to an additional $1,000,000 of new debt. Preferred: 8% for the first $500,000 of new preferred. 9% for up to an additional $500,000 of new preferred. Equity: 12% for retained earnings. 13% for up to the first $2,000,000 of new common stock. 14% for up to an additional $2,000,000 of new common stock. 15% for up to an additional $2,000,000 of new common stock. 4. What is the weighted average cost of capital for the very first dollar to be raised? A. 8.34% B. 8.72% C. 8.23% D. 8.00% E. 8.51% 5. What is the weighted average cost of capital for the entire $5,000,000 to be raised for the expansion? A. 8.34% B. 8.72% C. 8.23% D 8.00%. E. 8.51%...
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