Use the following information to answer the next three questions. Byron corporation’s present capital structure, which is also its target capital structure, is 40 percent debt and 60 percent common equity. Next year’s net income is projected to be $21,000, and Byron’s dividend payout ratio is 30 percent. The company’s earnings and dividends are growing at a constant rate of 5 percent; the last dividend (D0) was $2.00; and the stock is currently selling for $21.88. Byron can raise all the debt financing it needs at 14 percent. If Byron issues new common stock, a 20 percent flotation cost will be incurred. The firm’s marginal tax rate is 40 percent.8.What is the maximum amount of new capital that can be raised at the lowest component cost of equity? (In other words, what is the retained earnings break point?) 9.What is the component cost of new common stock? 10.Ignore the answer to # 12 and assume the component cost of equity is 18 percent. What is the weighted average cost of capital (WACC)? 11.Greene Co. bonds sell for $845.89. The coupon rate is 6.5 percent and the bonds mature in 22 years. Assume interest is paid semiannually and the firm’s tax rate is 35 percent. What is Greene’s after-tax cost of debt? 12.The weighted average cost of capital for firm X is currently 12%. Firm X is considering a new project but must raise new debt to finance the project. Debt represents 25% of the capital structure. If the after tax cost of debt will rise from 6% to 7%, what is the marginal cost of capital?
Use the following information to answer the next three questions J. Ross and Sons Inc. has a target capital structure that calls for 40 percent debt, 10 percent preferred stock, and 50 percent common equity. The firm's current after-tax cost of debt is 6 percent, and it can sell as much debt as it wishes at that rate. The firm's preferred stock currently sells for $90 a share and pays a dividend of $10 per share; however, the firm will net only $80 per share from the sale of new preferred stock.
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