The target capital structure for Millennium Corporation is 50 percent common stock, 5 percent preferred stock, and 45 percent debt. Its cost of equity is 15 percent, the cost of preferred stock is 6 percent, and the cost of debt is 8 percent. The relevant tax rate is 35 percent. What is Millennium’s WACC? – 2 marks The company president has approached you about its capital He wants to know why the company doesn’t use more preferred stock financing because it costs less than debt. What would you tell the president? – 3 mark

The target capital structure for Millennium Corporation is 50 percent common stock, 5 percent preferred stock, and 45 percent debt. Its cost of equity is 15 percent, the cost of preferred stock is 6 percent, and the cost of debt is 8 percent. The relevant tax rate is 35 percent. What is Millennium’s WACC? – 2 marks The company president has approached you about its capital He wants to know why the company doesn’t use more preferred stock financing because it costs less than debt. What would you tell the president? – 3 mark

EBK CFIN

6th Edition

ISBN:9781337671743

Author:BESLEY

Publisher:BESLEY

Chapter3: The Financial Environment: Markets, Institutions And Investment Banking

Section: Chapter Questions

Problem 9PROB

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Question 2 (5 marks)

What is Millennium’s WACC? – 2 marks

The company president has approached you about its capital He wants to know why the company doesn’t use more preferred stock financing because it costs less than debt. What would you tell the president? – 3 marks

Definition Definition Type of stock which is granted priority over dividend distributions as compared to common stockholders. Preferred stocks also do not carry any voting rights. Notably, in a case where a company is going to be liquidated, preferred stockholders have a priority claim on the value of assets of the company as quoted in the balance sheet, as compared to the common stockholders.

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