The management of Final Designs, Inc., or FinD, has decided that the optimal capital structure for their company would be: 25% debt, 15% preferred stock, and 60% common equity. FinD's federal-plus-state tax rate is 40%, and investors expect future earnings and dividends to grow at a constant rate of 9%. FinD paid a dividend of $3.60 per share last year, and its stock currently sells for $54.00 per share. FinD can obtain new capital in the following ways: (1) New preferred stock with a dividend of $11.00 can be sold to the public at a price of S$95.00 per share. (2) Debt can be sold at an interest rate of 12%. 1. Determine the after-tax cost of debt. 2. Calculate the cost of preferred stock. 3. Compute for the cost of common equity. 4. Calculate the WACC.
The management of Final Designs, Inc., or FinD, has decided that the optimal capital structure for their company would be: 25% debt, 15% preferred stock, and 60% common equity. FinD's federal-plus-state tax rate is 40%, and investors expect future earnings and dividends to grow at a constant rate of 9%. FinD paid a dividend of $3.60 per share last year, and its stock currently sells for $54.00 per share. FinD can obtain new capital in the following ways: (1) New preferred stock with a dividend of $11.00 can be sold to the public at a price of S$95.00 per share. (2) Debt can be sold at an interest rate of 12%. 1. Determine the after-tax cost of debt. 2. Calculate the cost of preferred stock. 3. Compute for the cost of common equity. 4. Calculate the WACC.
Chapter9: The Cost Of Capital
Section: Chapter Questions
Problem 1STP
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The management of Final Designs, Inc., or FinD, has decided that the optimal capital structure for
their company would be: 25% debt, 15% preferred stock, and 60% common equity.
FinD's federal-plus-state tax rate is 40%, and investors expect future earnings and dividends to grow
at a constant rate of 9%. FinD paid a dividend of $3.60 per share last year, and its stock currently sells
for $54.00 per share. FinD can obtain new capital in the following ways: (1) New preferred stock with
a dividend of $11.00 can be sold to the public at a price of $95.00 per share. (2) Debt can be sold at
an interest rate of 12%.
1. Determine the after-tax cost of debt.
2. Calculate the cost of preferred stock.
3. Compute for the cost of common equity.
4. Calculate the WACC.
5. Suppose FinD has five independent projects as investment opportunities with the following
costs and rates of return: (A) 17.4%; (B) 16.0%; (C) 14.2%; (D) 13.2%; and (E) 12%. Assuming
FinD does not want to issue new common stocks, which projects should FinD accept? Why?
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