PROBLEM FOR CHAPTERS TEN AND ELEVEN Saint Leo Manufacturing is going to introduce a new product line and to accomplish this it has four projects analyzed in which it wants to invest a total of $100 mil ion. Your job is to find what it wil cost to raise this amount of capital and based on the cost of capital determine which of the projects should be accepted by the firm to invest in. PROJECTS A B C D INVESTMENT $30,000,000 $20,000,000 $25,000,000 $25,000,000 EXPECTED RETURN 10.00% 14.00% 11.50% 16.00% The firms capital structure consists of: FMV CAPITAL PERCENTAGE AMOUNT DEBT 30% $15,000,000 PREFERRED STOCK 10% $5,000,000 COMMON STOCK 60% $30,000,000 $50,000,000 Other information about the firm: CORPORATE TAX RATE 35% DEBT CURRENT PRICE $900.00 ANNUAL INTEREST 9.00% CURRENT INTERST PAID SEMIANNUALLY ORIGINAL MATURITY 25 YEARS, BUT NOW 20 YEARS LEFT MATURITY VALUE $1,000.00 FLOTATION COST INSIGNIFICANT MARKET YIELD PROJECTED: UP TO $20 MILLION 9% ABOVE $20 MILLION 12% 3 % additional premium PREFERRED CURRENT PRICE $50.00 $5.00 FIXED AT 10% OF PAR FLOTATION COST $2.00 $5.00 COMMON CURRENT PRICE $33.00 $1.50 RETAINED EARNINGS $16,000,000 GROWTH RATE (g) 9% FLOTATION COST
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This note was uploaded on 11/21/2011 for the course MGT-325 CL03 taught by Professor Maddron during the Spring '11 term at St. Leo.