F1 Builtrite has come up with the following capital structure which management believes is optimal:Debt40%Preferred stock10%Common stock50%Bonds: Builtrite is planning on offering a $1000 par value, 20-year, 8% coupon bond with an expectedselling price of $1025. Flotation costs would be $55 per bond.Preferred Stock: Builtrite could sell a $49 par value preferred with an 8% coupon for $42 a share.Flotation costs would be $2 a share.Common stock: Currently, the stock is selling for $62 a share and has paid a $2.82 dividend. Dividendsare expected to continue growing at 10%. Flotation costs would be $3.75 a share and Builtrite has$350,000 in available retained earnings.Assume a 40% tax bracket.What is the after-tax cost of preferred stock?9.80%O 6.47%O 9.68%○ 8.76%#3EF3F4*-54R%285TF66YF7&7CFB8*COP

Here's a detailed calculation for better understanding.Since preferred stock dividends are not…

Answered: Builtrite has come up with the…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter12: The Cost Of Capital

Section: Chapter Questions

Problem 17P

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A firm has determined its optimal capital structure, which is composed of the following sources and target market value proportions: Debt: The firm can sell a 20-year, $1,000 par value, 9 percent bond for $980. A flotation cost of 2 percent of the face value would be required in addition to the discount of $20. Preferred Stock: The firm has determined it can issue preferred stock at $65 per share par value. The stock will pay an $8.00 annual dividend. The cost of issuing and selling the stock is $3 per share. Common Stock: The firm's common stock is currently selling for $40 per share. The dividend expected to be paid at the end of the coming year is $5.07. Its dividend payments have been growing at a constant rate for the last five years. Five years ago, the dividend was $3.45. It is expected that to sell, a new common stock issue must be underpriced at $1 per share and the firm must pay $1 per share in flotation costs. Additionally, the firm's marginal tax rate is 40 percent.…
Newman International has an optimal capital structure that consists of 35.00% debt, 15.00% preferred equity, and 50.00% common equity. Their new bond issue will have a coupon rate of 7.20%. Their preferred stock currently sells for $40 per share, and floating new shares would cost $2.00 per share. The preferred dividend is fixed at $2.60 annually. Newman’s common stock has a current market price of $33.00, and floating new common shares would cost Newman 6.00% of the share price. The most recent annual common dividend paid was $2.50, and the dividend is expected to grow at an annual rate of 5.00%. The firm’s marginal tax rate is 30.00%. Use these data to calculate Newman’s cost of issuing new common equity. Calculate the percentage to 2 decimal places
Newman International has an optimal capital structure that consists of 35.00% debt, 15.00% preferred equity, and 50.00% common equity. Their new bond issue will have a coupon rate of 7.20%. Their preferred stock currently sells for $40 per share, and floating new shares would cost $2.00 per share. The preferred dividend is fixed at $2.60 annually. Newman’s common stock has a current market price of $33.00, and floating new common shares would cost Newman 6.00% of the share price. The most recent annual common dividend paid was $2.50, and the dividend is expected to grow at an annual rate of 5.00%. The firm’s marginal tax rate is 30.00%. Use these data to calculate Newman’s WACC using internal equity and new common equity. Calculate the percentage to 2 decimal places
Newman International has an optimal capital structure that consists of 35.00% debt, 15.00% preferred equity, and 50.00% common equity. Their new bond issue will have a coupon rate of 7.20%. Their preferred stock currently sells for $40 per share, and floating new shares would cost $2.00 per share. The preferred dividend is fixed at $2.60 annually. Newman’s common stock has a current market price of $33.00, and floating new common shares would cost Newman 6.00% of the share price. The most recent annual common dividend paid was $2.50, and the dividend is expected to grow at an annual rate of 5.00%. The firm’s marginal tax rate is 30.00%. Use these data to calculate Newman’s after-tax cost of debt. Calculate the percentage to 2 decimal places (0.03148 = 3.15) 6
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Mackenzie Company has a price of $34 and will issue a dividend of $2.00 next year. It has a beta of 1.5, the risk-free rate is 5.2%, and the market risk premium is estimated to be 5.2%. a. Estimate the equity cost of capital for Mackenzie. b. Under the CDGM, at what rate do you need to expect Mackenzie's dividends to grow to get the same equity cost of capital as in part (a)?
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