Cost of Capital 17

# Cost of Capital 17 - Preferred 8 for the first \$500,000 of...

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Old Exam Questions - Cost of Capital Page 17 of 27 Pages D. 11.54% E. 10.64% 29. Your company's current market-valued capital structure, which is considered to be optimal, is shown below: Debt 30% Preferred Stock 20% Equity 50% In order to meet their expansion plans for next year, the company has decided to raise \$4,000,000. Net Income is expected to be \$350,000 next year. However, preferred stock dividends are expected to account for \$50,000 of this profit. The common stock dividend payout rate is 35% of the profit after the payment of preferred dividends. The corporate tax rate is equal to 40%, and the before-tax costs of new financing are estimated to be: Debt: 4% for the first \$500,000 of new debt. 5% for up to an additional \$1,000,000 of new debt. 6% for up to an additional \$1,000,000 of new debt.
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Unformatted text preview: Preferred: 8% for the first \$500,000 of new preferred. 9% for up to an additional \$500,000 of new preferred. Equity: 13% for retained earnings. 14% for up to the first \$2,000,000 of new common stock. 15% for up to an additional \$2,000,000 of new common stock. 16% for up to an additional \$2,000,000 of new common stock. Given this information, determine the weighted average cost of capital for the entire \$4,000,000 to be raised for the expansion. A. 9.65% B. 8.85% C. 9.45% D. 9.05% E. 9.25% 30. Assume that your firm has a weighted average cost of capital of 10.00%, and has a capital structure consisting of 40 percent debt and 60 percent equity. Also assume that the firm’s tax rate is 40 percent and that its cost of stock/equity (ignore flotation costs) is 14 percent. Given this information, determine the firm’s before-tax cost of debt. A. 6.875% B. 6.500% C. 6.667% D. 6.125% E. 6.333%...
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