Problem: Owen's enterprises is in the process of determining its capital budget for the next fiscal year. The firms current capital structure, which it considers to be optimal, is contained in the following balance sheet.
| Balance Sheet |
|
|
|
|
|
|
|
| Current Assets |
$40,000,000 |
|
Accounts Payable |
|
|
$20,000,000 |
| Fixed Assets |
400,000,000 |
|
Other Current Liabilities |
|
10,000,000 |
| Total Assets |
$440,000,000 |
|
Long term debt |
|
|
123,000,000 |
|
|
|
|
Common Stock at par |
|
15,000,000.00 |
|
|
|
|
Paid in capital in excess of par |
|
51,000,000 |
|
|
|
|
retained earnings |
|
|
220,500,000 |
|
|
|
|
Total Liabilities and |
|
|
|
|
|
|
|
stockholders equity |
|
|
$440,000,000 |
The following information has been obtained from conversations with financial officers, and the firms investment banker and lead bank
• The firm expects net income from this year to total $80 million. The firm intends to maintain its dividend policy of paying 42.25 percent of earnings to stock holders
• The firm can borrow $18 million from its bank at a 13 percent annual rate
• Any additional debt can be obtained through the issuance of debentures (at par) that carry a 15 percent coupon rate
• The firm currently pays $4.40 per share in dividends (Do). Dividends have grown at a 5% rate in the past. This growth is expected to continue
• The firm's common stock currently trades at $4 per share. If the firm were to raise any external equity the newly issued shares would net the company $40 per share
• The firm is in the 40% marginal tax bracket.
Computes Owens marginal cost of capital schedule.
Should I begin with a cash flow schedule?