Problem: Here is the company's balance sheet:
Assets:
Cash- $2,000,000
Accts. Receivable- $28,000,000
Inventories- $42,000,000
Net Fixed Assets- $133,000,000
Total Assets- $205,000,000
Liabilities:
Accts. Payable- $18,000,000
Notes Payable- $40,000,000
Long-Term Debt- $60,000,000
Preferred Stock- $10,000,000
Common Equity- $77,000,000
Total Liabilities- $205,000,000
Other Info:
Last Year's Sales- $225,000,000
- The Company has 60,000 bonds with a 30-year life outstanding, with 15 years till maturity. The bonds carry a 10% semi-annual coupon and are currently selling for $874.78.
- They also have 100,000 shares of $100 par, 9% dividend perpetual preferred stock outstanding. The current market price is $90.00. Any new issues of preferred stock would incur a $3.00 per share float cost.
-They have 10 million shares of common stock outstanding with a current price of $14.00 a share. The stock exhibits a constant growth rate of 10%. The last dividend(Do) was $.80. New stock could be sold with flotation costs, including market pressure, of 15%.
-The risk free rate is currently 6% and the rate of return on the stock market as a whole is 14%. The company stock's beta is 1.22.
-Stockholders require a risk premium of 5% above the return on the firms bonds.
-The firm expects to have additional retained earnings of $10 million in the coming year and expects a depreciation expenses of $35 million.
-The firm does not use notes payable for long-term financing.
-The firm considers its market value capital structure to be optimal and wishes to maintain that structure.
-The firm's federal+state marginal tax rate is 40%.
-The firm's dividend payout ration is 50% and net profit margin was 8.89%.
Now, with all this information, I am supposed to find the cost of the following individual capital components:
A. long-term debt
B. preferred stock
C. retained earnings (supposed to use the average of CAPM, DCF, and the bond yield + premium approach)
D. new common stock