Balance Sheet: Wisconsin Dairy Product, millions of dollars:
Current assets $100 Current Liabilities $50
Fixed assets 400 Long-term debt 200
Deferred Taxes 50
Common Stock 100
Retained Earnings 100
Total Assets 500 T L & NW $500
The debt consists of 20-year, 8 percent, $1000 bonds, presently selling at $701.25. Flotation costs on new bonds would raise the effective before tax interest cost to 0.5 percent above the yield to maturity on existing debt. The company has 10 million shares of common stock outstanding, with a market price of $30 a share. The stock has a beta of 1.5. The risk-free rate is 10 percent and the average market risk premium is 6.5 percent. Flotation costs would raise the effective cost of new equity by 1 percent over the cost of existing equity. Over the next year, which is the company's capital investment planning period, the company expects to have $20 million of internally generated funds in addition to net income of $30 million. At least half of the net income must be paid put in dividends. The company faces a 35 percent marginal tax rate. Prepare a marginal cost of capital schedule.