Discussion
1. Johnson Industries finances its projects with 40 percent debt, 10 percent preferred stock, and 50 percent common stock. The company can issue bonds at a yield to maturity of 8.4 percent. The cost of preferred stock is 9 percent. The company's common stock currently sells for $30 a share. The company's dividend is currently $2.00 a share (D0 = $2.00), and is expected to grow at a constant rate of 6 percent per year. Assume that the flotation cost on debt and preferred stock is zero, and no new stock will be issued. The companys tax rate is 30 percent. What is the company weighted average cost of capital (WACC)?
2. INC has the following balance sheet (in millions of dollars): Current assets 3.00 Accounts payable $1.2 Net fixed 4.0 Notes payable 0.8 Accrued wages and taxes 0.3 Total current liabilities $2.3 Long-term debt 1.2 Common equity 1.Retained earnings 2.0 Total assets $7.0 Total liabilities and equity $7.0 Last year's sales were $10 million, and Apex estimates it will need to raise $2 million in new debt and equity next year. You have identified the following facts: (1) it pays out 30 percent of earnings as dividends; (2) a profit margin of 4 percent is projected; (3) fixed assets were used to full capacity; and (4) assets and spontaneous liabilities as shown on last year's balance sheet are expected to grow proportionally with sales. If the above assumptions hold, what sales growth rate is the firm anticipating?