On 1st January, the total assets of Manticore Corporation were $35 million. During the year the company plans to raise and invest $15 million. The firm's present capital structure, shown below, is considered the optimal. Assume that there is no short-term debt. Debt $14,000,000 Common equity 21,000.000 Total liabilities and equity $35,000,000 New bonds will have an 11.00 percent coupon rate and will be sold at par. Common stock, currently selling at $50 a share, can be sold to net the company $42.50 a share. The stockholders' required rate of return is estimated to be 15.00 percent, consisting of a dividend yield of 6.00 percent and an expected growth rate of 9.00 percent. Net income for the year is estimated to be $5,625,000, and dividends of $3.00 per share will be paid on 1,500,000 shares of common equity. The marginal corporate tax rate is 40 percent.
a. Assuming that all asset expansion (gross expenditures for noncurrent assets plus related net operating working capital) is included in the capital budget, what is the dollar amount of the capital budget?
b. To maintain the present capital structure, how much of the capital budget must be financed by common equity?
c. How much of the needed new common equity funds will be generated internally? Externally?
d. What is the cost of each of the common equity components?
e. At what level of capital expenditures will there be a break in the MCC schedule?
f. Calculate the MCC (1) below and (2) above the break in the schedule.
g. Plot the MCC schedule. Also, draw in an investment opportunity schedule that is consistent with both the MCC schedule and the projected capital budget. Any IOS that is consistent will do.