Morgan Corporation must obtain $8 million in financing for its expansion plans. The firm's credit rating is good. Common stock is now selling at $50 per share. Preferred stock has a dividend rate of 15 percent. Long-term debt has an interest rate of 19 percent. The tax rate is 46 percent.
Applicable ratios for Morgan and the industry are:
|
Industry
|
Morgan
|
|
Net income to total assets
|
15%
|
24%
|
|
Long-term debt to total assets
|
29%
|
26%
|
|
Total liabilities to total assets
|
48%
|
44%
|
|
Preferred stock to total assets
|
4%
|
0
|
|
Current ratio
|
3.1
|
3.8
|
|
Net income plus interest to interest
|
9
|
15
|
Dividends per share are $6. The growth rate in dividends is 5 percent, there is no sinking fund provision, net income and sales show stability, and the current ownership group wants to maintain its control.
a) What is the cost of common stock?
b) What is the cost of preferred stock?
c) What is the cost of long-term debt?
d) What source of financing is recommended?