Last year Pilya, Inc. had P50 million in total assets. Management desires its plant and equipment during the coming year by P12 million. The comp finance 40% of the expansion with debt and the remaining 60% with equi Bond financing will be at 9% coupon rate and will be sold at par value. C is currently selling at P50 per share, and flotation costs for new common to P5 per share. The expected dividend next year for Pilya is P2.50. Furt dividends are expected to grow at 6% rate far into the future. Corporate t Internal funding available from additions to retained earnings is P4 million
Last year Pilya, Inc. had P50 million in total assets. Management desires its plant and equipment during the coming year by P12 million. The comp finance 40% of the expansion with debt and the remaining 60% with equi Bond financing will be at 9% coupon rate and will be sold at par value. C is currently selling at P50 per share, and flotation costs for new common to P5 per share. The expected dividend next year for Pilya is P2.50. Furt dividends are expected to grow at 6% rate far into the future. Corporate t Internal funding available from additions to retained earnings is P4 million
Chapter14: Capital Structure Management In Practice
Section: Chapter Questions
Problem 12P
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Transcribed Image Text:6. Last year Pilya, Inc. had P50 million in total assets. Management desires to increase
its plant and equipment during the coming year by P12 million. The company plans to
finance 40% of the expansion with debt and the remaining 60% with equity capital.
Bond financing will be at 9% coupon rate and will be sold at par value. Common stock
is currently selling at P50 per share, and flotation costs for new common will amount
to P5 per share. The expected dividend next year for Pilya is P2.50. Furthermore,
dividends are expected to grow at 6% rate far into the future. Corporate tax is 25%.
Internal funding available from additions to retained earnings is P4 million.
a. What amount of new common stock must be sold if the existing capital structure is
to be maintained?
b. Calculate the weighted average cost of capital at an investment level of P12
million, assuming amount of retained earnings will not be used
c. Calculate the weighted average cost of capital at an investment level of P12 million,
assuming both retained earnings is used and issuance of new stock in order to
realized the portion of equity financing.
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