Tex-Mex by Rex, Inc. is planning its yearly budget and has the following potential independent proposals:
PROJECT OUTLAY IRR
A $5,000,000 11.0%
B $5,000,000 18.0%
C $8,000,000 16.0%
D $12,000,000 10.5%
E $12,000,000 12.0%
The firm’s capital structure shown below is considered optimal and will be maintained:
Debt $80,000,000
Preferred Stock $20,000,000
Common Equity $100,000,000
The firm has a marginal tax rate of 35% and has $5,000,000 of retained earnings available for investment. Four years ago, Tex-Mex by Rex, Inc. paid a common stock dividend of $3.75 a share. Yesterday, they paid a dividend of $5.00. Assume that this dividend growth rate continues for the indefinite future. The market price for its common stock is $82 with a beta of 1.25. Currently, the YTM on T-Bonds is 2% and the expected market return is 10%. Tex-Mex by Rex, Inc. can raise funds under the following limitations:
BONDS: New 20-year $1000 par value bonds carrying a coupon of 12% (annual) are priced to yield the investor 10% a year. Flotation costs total $70.27 per bond.
PREFERRED STOCK: Current shares of preferred stock have a dividend of $3.50 and are selling for $50 per share. Underwriters charge a flotation fee of 12% of the selling price.
COMMON STOCK: New common stock requires flotation costs equal to 13% of the stock’s price.
Calculate the Cost of New Common Stock.