Solved by Expert Tutors
Solved by Expert Tutors
Question

# On January 1, 2019, the total assets of the Dexter Company were \$270

million. The firm's present capital structure, which follows, is considered to be optimal. Assume that there is no short-term debt. New bonds will have a 10 percent coupon rate and will be sold at par. Common stock, currently, selling at \$60 a share, can be sold to net the company \$54 a share. Stockholders' required rate of return is estimated to be 12 percent., consisting of a dividend yield of 4 percent and an expected growth rate of 8 percent. (The next expected dividend is \$2.40, so \$2.40/\$60 = 4%.) Retained earnings are estimated to be \$13.50 million. The marginal tax rate is 40 percent. Assuming that all asset expansion (gross expenditures for fixed assets plus related working capital) is included in the capital budget, the dollar amount of the capital budget, ignoring depreciation is \$135 million. The marginal tax rate is 40 percent. Assuming that all asset expansion (gross expenditures for fixed assets plus related working capital) is included in the capital budget, the dollar amount of the capital budget, ignoring depreciation is \$135 million. Required: 1. To maintain the present capital structure, how much of the capital budget must Dexter finance by equity? (4 marks) 2. How much of the new equity funds needed will be generated internally? Externally? (3 marks) 3. Calculate the cost of each of the equity components. (5 marks) 4. At what level of capital expenditure will there be a break in Dexter's Marginal Cost of Capital schedule? (3 marks) 5. Calculate WACC. (5 marks) Long-term debt \$135,000,000 Common equity \$135,000,000

lestie consequat, ultrices ac magna. Fusce

Donec aliquet. Lorem ipsum dolor sit amet, consectetur adipiscing e

ce dui lectus, congue vel laoreet ac, dictum vitae odio. Donec aliquet

acinia pulvi

ctum fficitur laoreet. Nam risus ante, dapib dictum vitae o inia pulvin a molestie o. Donec aliq ffic iscing elit. inia pulvin a molestie les ipi trices ac magna. Fusce dui lectu amet, consectet

### Why Join Course Hero?

Course Hero has all the homework and study help you need to succeed! We’ve got course-specific notes, study guides, and practice tests along with expert tutors.

• ### -

Study Documents

Find the best study resources around, tagged to your specific courses. Share your own to gain free Course Hero access.

Browse Documents