Company X has the following capital structure, which it considers to be optimal: Debt =33%, Preferred stock = 28%, Common equity = 39% Company X’s tax rate is 25% and investors expect earnings and dividends to grow at a constant rate of 6.5% in the future. Company X is expected to pay a dividend of $4.40 per share next year, and its stock currently sells at a price of $55 per share. Company X can obtain new capital in the following ways: • Preferred: New preferred stock with a dividend of $13 can be sold to the public at a price of $109 per share. • Debt: Debt can be sold at an interest rate of 11%. Calculate and answer the following: A. Cost of Common equity? B. Cost of Preferred Equity? C. Cost of debt?
Company X has the following capital structure, which it considers to be optimal: Debt =33%, Preferred stock = 28%, Common equity = 39% Company X’s tax rate is 25% and investors expect earnings and dividends to grow at a constant rate of 6.5% in the future. Company X is expected to pay a dividend of $4.40 per share next year, and its stock currently sells at a price of $55 per share. Company X can obtain new capital in the following ways: • Preferred: New preferred stock with a dividend of $13 can be sold to the public at a price of $109 per share. • Debt: Debt can be sold at an interest rate of 11%. Calculate and answer the following: A. Cost of Common equity? B. Cost of Preferred Equity? C. Cost of debt?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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100%
Company X has the following capital structure, which it considers to be optimal:
Debt =33%,
Company X’s tax rate is 25% and investors expect earnings and dividends to grow at a constant rate of 6.5% in the future. Company X is expected to pay a dividend of $4.40 per share next year, and its stock currently sells at a price of $55 per share.
Company X can obtain new capital in the following ways:
- • Preferred: New preferred stock with a dividend of $13 can be sold to the public at a price of $109 per share.
- • Debt: Debt can be sold at an interest rate of 11%.
Calculate and answer the following:
A.
B. Cost of Preferred Equity?
C. Cost of debt?
D. Weighted Average Cost of Capital (WACC)
E. Which source of capital is the most costly?
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