The Ewing Distribution Company is planning a $100 million expansion of its chain of discount service stations to several neighboring states. This expansion will be financed, in part, with debt issued with a coupon interest rate of 15 percent. The bonds have a 10-year maturity and a $1,000 face value, and they will be sold to net Ewing $990 after issue costs. Ewing's marginal tax rate is 40 percent. Preferred stock will cost Ewing 14 percent after taxes. Ewing's common stock pays a dividend of $2 per share. The current market price per share is $15, and new shares can be sold to net $14 per share. Ewing's dividends are expected to increase at an annual rate of 5 percent for the foreseeable future. Ewing expects to have $20 million of retained earnings available to finance the expansion. Ewing's target capital structure is as follows: Debt 20% Preferred stock
The Ewing Distribution Company is planning a $100 million expansion of its chain of discount service stations to several neighboring states. This expansion will be financed, in part, with debt issued with a coupon interest rate of 15 percent. The bonds have a 10-year maturity and a $1,000 face value, and they will be sold to net Ewing $990 after issue costs. Ewing's marginal tax rate is 40 percent. Preferred stock will cost Ewing 14 percent after taxes. Ewing's common stock pays a dividend of $2 per share. The current market price per share is $15, and new shares can be sold to net $14 per share. Ewing's dividends are expected to increase at an annual rate of 5 percent for the foreseeable future. Ewing expects to have $20 million of retained earnings available to finance the expansion. Ewing's target capital structure is as follows: Debt 20% Preferred stock
Chapter12: The Cost Of Capital
Section: Chapter Questions
Problem 8P
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Transcribed Image Text:8. The Ewing Distribution Company is planning a $100 million expansion of its chain
of discount service stations to several neighboring states. This expansion will be
financed, in part, with debt issued with a coupon interest rate of 15 percent. The
bonds have a 10-year maturity and a $1,000 face value, and they will be sold to net
Ewing $990 after issue costs. Ewing's marginal tax rate is 40 percent.
Preferred stock will cost Ewing 14 percent after taxes. Ewing's common stock
pays a dividend of $2 per share. The current market price per share is $15, and
new shares can be sold to net $14 per share. Ewing's dividends are expected to
increase at an annual rate of 5 percent for the foreseeable future. Ewing expects to
have $20 million of retained earnings available to finance the expansion.
Ewing's target capital structure is as follows:
INTERMEDIATE
Debt
20%
Preferred stock
Common equity
75
Calculate the weighted cost of capital that is appropriate to use in evaluating this
expansion program.
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