Company A has a capital structure: debt 25%, Equity 60%, Preference 15%. Its tax rate 40%, and carnings (and dividends) are expected to grow at a constant 9%. Last year's dividend was $3.60 and the stock price is currently $54. The company is evaluating two options for raising more capital; (i) debt @ 12% (ii) preference stock paying a dividend of $11/share and with a price of $95/share. Find (i) The cost of each capital component (ii) The company's WACC (iii) The firm is evaluating projects A-E which are independent of each other. Which project or projects should it choose? Rate of Return (%) Cost ($) ($20,000) ($10,000) ($20,000) ($10,000) ($20,000) Project A 17.4 16 14.2 13.7 12
Company A has a capital structure: debt 25%, Equity 60%, Preference 15%. Its tax rate 40%, and carnings (and dividends) are expected to grow at a constant 9%. Last year's dividend was $3.60 and the stock price is currently $54. The company is evaluating two options for raising more capital; (i) debt @ 12% (ii) preference stock paying a dividend of $11/share and with a price of $95/share. Find (i) The cost of each capital component (ii) The company's WACC (iii) The firm is evaluating projects A-E which are independent of each other. Which project or projects should it choose? Rate of Return (%) Cost ($) ($20,000) ($10,000) ($20,000) ($10,000) ($20,000) Project A 17.4 16 14.2 13.7 12
Chapter9: The Cost Of Capital
Section: Chapter Questions
Problem 1STP
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Transcribed Image Text:Company A has a capital structure: debt 25%, Equity 60%, Preference 15%. Its tax rate 40%, and
earnings (and dividends) are expected to grow at a constant 9%. Last year's dividend was $3.60
and the stock price is currently $54. The company is evaluating two options for raising more
capital; (i) debt @ 12% (ii) preference stock paying a dividend of $11/share and with a price of
$95/share.
Find (i) The cost of each capital component
(ii) The company's WACC
(iii) The firm is evaluating projects A - E which are independent of each other. Which
project or projects should it choose?
Rate of Return (%)
17.4
Cost ($)
($20,000)
($10,000)
($20,000)
($10,000)
($20,000)
Project
A
16
14.2
13.7
12
BCDE
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