A company has a capital structure of 45% debt, 5% preferred stock and 50% common equity.
(a) The company can obtain unlimited debt at an interest rate of 10%. The marginal tax rate is 35%. Find the after-tax cost of debt.
(b) Preferred stock carries a dividend of $14 and currently sells for $120.00. Flotation cost on preferred stock is $10 per share. What is the cost of preferred stock?
(c) Their current stock price is $25. The next dividend is expected to be $2.56 and growth is constant at 8%. If new common stock is issued, it will have a flotation cost of 10%. Find the cost of retained-earnings and the cost of issuing new common shares.
(d) If the net income is expected to be $1,600,000, and the company's policy is to pay 50% of net-income for dividends, what is the break point caused by using all of retained-earnings?
(e) Find the WACC using retained earnings and the WACC when new equity is issued.* A company has a WACC1=12.5% for funding up to $4 million when retained earnings are used.They also have a WACC2=13.7% for funding above $4 million when new equity is raised. If they have the following independent investment opportunities, which projects should the company include in their budget? What is the company's optimal capital budget?
Project A: Cost of $2 million; IRR 20%.
Project B: Cost of $3 million; IRR 14%
Project C: Cost of $4 million; IRR 13%