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cost of preferred shares

cost of preferred shares

Essentials Of Investments
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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How large can the cost of preferred shares be and it will still be profitable for the firm to invest in all four projects?

7.75%

8.90%

10.46%

11.54%

ABC Co. has the following investment opportunities for 2022 with the related expected costs and returns: Project COST RETURN P2,000,000 A 16.00% 3,000,000 5,000,000 B 14.50% 11.50% D 3,000,000 9.50% The target capital structure of ABC Co. consists of 40% ordinary equity, 40% debt, and 20% preferred equity. The firm has P1,000,000 retained earnings. Expected year-end dividend is P3 per share which is expected to grow at 5% a year. Ordinary share is currently selling at P42.75 and issuance of new shares will entail 10% flotation cost. ABC Co. can issue corporate bonds with a yield to maturity of 10%. The company is subject to 30% income tax.
Transcribed Image Text:ABC Co. has the following investment opportunities for 2022 with the related expected costs and returns: Project COST RETURN P2,000,000 A 16.00% 3,000,000 5,000,000 B 14.50% 11.50% D 3,000,000 9.50% The target capital structure of ABC Co. consists of 40% ordinary equity, 40% debt, and 20% preferred equity. The firm has P1,000,000 retained earnings. Expected year-end dividend is P3 per share which is expected to grow at 5% a year. Ordinary share is currently selling at P42.75 and issuance of new shares will entail 10% flotation cost. ABC Co. can issue corporate bonds with a yield to maturity of 10%. The company is subject to 30% income tax.
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