1. Assume that a firm in operation is 70% equity and 30% debt. You estimate that the required rate of return on the equity is 15% and that the business could borrow at an interest rate of 8% and the tax rate 25%. The weighted-average cost of capital is therefore
2. List types of acquisition and discus each one?
3. STC Internet, Inc. is evaluating its cost of capital under alternative financing arrangements. In consultation with investment bankers, STC expects to be able to issue new debt at par with a coupon rate of 8% and to issue new preferred stock with a $2.50 per share dividend at $25 a share. The common stock of STC is currently selling for $20.00 a share. STC expects to pay a dividend of $1.50 per share next year. Market analysts foresee a growth in dividends in Invest stock at a rate of 5% per year. STC marginal tax rate is 35%.
a. If STC raises capital using 45% debt, 5% preferred stock, and 50% common stock, what is STC cost of capital?
b. If STC raises capital using 30% debt, 5% preferred stock, and 65% common stock, what is STC cost of capital?
4. What are the determinants of option values?