The management of a conservative firm has adopted a policy of never letting debt exceed 30 percent of total financing. The firm will earn $20,000,000 but distribute 30 percent in dividends, so the firm will have $14,000,000 to add to retained earnings. Currently the price of the stock is $60; the company pays a $5 per share dividend, which is expected to grow annually at 9 percent. If the company sells new shares, the net to the company will be $55. Given this information, what is the cost of retained earnings? Round your answer to one decimal place. % cost of new common stock? Round your answer to one decimal place. %
The management of a conservative firm has adopted a policy of never letting debt exceed 30 percent of total financing. The firm will earn $20,000,000 but distribute 30 percent in dividends, so the firm will have $14,000,000 to add to
- cost of retained earnings? Round your answer to one decimal place.
%
- cost of new common stock? Round your answer to one decimal place.
%
The rate of interest on the firm’s long-term debt is 9 percent and the firm is in the 32 percent income tax bracket. If the firm issues more than $2,100,000, the interest rate will rise to 10 percent. Given this information, what is the
- cost of debt? Round your answer to one decimal place.
%
- cost of debt in excess of $2,100,000? Round your answer to one decimal place.
%
The firm raises funds in increments of $3,600,000 consisting of $1,080,000 in debt and $2,520,000 in equity. This strategy maintains the capital structure of 30 percent debt and 70 percent equity. Develop the marginal cost of capital schedule through $12,000,000. Round your answers for the break-points to the nearest dollar and for the marginal costs to one decimal place.
The marginal cost of capital schedule:
| $0 - $ | |
| cost of debt: % | |
| cost of capital: % |
| $ - $ | |
| cost of debt: % | |
| cost of equity: % | |
| cost of capital: % |
| above $ | |
| cost of debt: % | |
| cost of equity: % | |
| cost of capital: % |
What impact would each of the following have on the marginal cost of capital schedule?
- the firm’s income tax rate increases
If income tax rates were to rise, the effective cost of debt would , and the marginal cost of capital would at all levels.
- the firm retains all of its earnings and the price of the stock is unaffected. Round your answers for the break-point to the nearest dollar and for the marginal costs to one decimal place.
The marginal cost of capital schedule:
$0 - $ cost of debt: % cost of equity: % cost of capital: % $ - $ cost of debt: % cost of equity: % cost of capital: % above $ cost of debt: % cost of equity: % cost of capital: % - $12,000,000 is insufficient to meet attractive investment opportunities
If the firm needs more than $12,000,000 that fact the marginal cost of capital schedule.
Step by step
Solved in 4 steps
