Old Exam Questions - Cost of Capital Page 19 of 27 Pages C. $6.25 million D. $5.50 million E. $5.75 million 35. Assume that your company finances its operations with 40 percent debt, 10 percent preferred stock, and 50 percent equity. Also assume that the preferred stock pays an annual dividend of $2 and sells for $20 a share, that the company’s common stock trades at $30 a share, that its current common stock dividend (D0 ) of $2 a share is expected to grow at a constant rate of 8 percent per year, and that the flotation cost of external equity is 15 percent of the dollar amount issued, while the flotation cost on preferred stock is 20 percent. Now assume that the firm’s tax rate is 35 percent, that the firm will not have enough retained earnings to fully fund the equity portion of its capital budget, and that the marginal cost of capital for the last dollar to be raised is 12.75 percent. Determine the firm’s before-tax cost of debt financing. A.
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This note was uploaded on 07/13/2011 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.