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Discussion Questions: The management of Final Designs, Inc., or FinD, has decided that the optimal capital structure for their company would be: 25% debt, 15% preferred stock, and 60% common equity. FinD's federal-plus-state tax rate is 40%, and investors expect future earnings and dividends to grow at a constant rate of 9%. FinD paid a dividend of $3.60 per share last year, and its stock currently sells for $54.00 per share. FinD can obtain new capital in the following ways: (1) New preferred stock with a dividend of $11.00 can be sold to the public at a price of $95.00 per share. (2) Debt can be sold at an interest rate of 12%. 1. Determine the after-tax cost of debt. 2. Calculate the cost of preferred stock. 3. Compute for the cost of common equity. 4. Calculate the WACC. 5. Suppose FinD has five independent projects as investment opportunities with the following

Discussion Questions: The management of Final Designs, Inc., or FinD, has decided that the optimal capital structure for their company would be: 25% debt, 15% preferred stock, and 60% common equity. FinD's federal-plus-state tax rate is 40%, and investors expect future earnings and dividends to grow at a constant rate of 9%. FinD paid a dividend of $3.60 per share last year, and its stock currently sells for $54.00 per share. FinD can obtain new capital in the following ways: (1) New preferred stock with a dividend of $11.00 can be sold to the public at a price of $95.00 per share. (2) Debt can be sold at an interest rate of 12%. 1. Determine the after-tax cost of debt. 2. Calculate the cost of preferred stock. 3. Compute for the cost of common equity. 4. Calculate the WACC. 5. Suppose FinD has five independent projects as investment opportunities with the following

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
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Discussion Questions: The management of Final Designs, Inc., or FinD, has decided that the optimal capital structure for their company would be: 25% debt, 15% preferred stock, and 60% common equity. FinD's federal-plus-state tax rate is 40%, and investors expect future earnings and dividends to grow at a constant rate of 9%. FinD paid a dividend of $3.60 per share last year, and its stock currently sells for $54.00 per share. FinD can obtain new capital in the following ways: (1) New preferred stock with a dividend of $11.00 can be sold to the public at a price of $95.00 per share. (2) Debt can be sold at an interest rate of 12%. 1. Determine the after-tax cost of debt. 2. Calculate the cost of preferred stock. 3. Compute for the cost of common equity. 4. Calculate the WACC. 5. Suppose FinD has five independent projects as investment opportunities with the following costs and rates of return: (A) 17.4%; (B) 16.0%; (C) 14.2%; (D) 13.2%; and (E) 12%. Assuming FinD does not want to issue new common stocks, which projects should FinD accept? Why?
Transcribed Image Text:Discussion Questions: The management of Final Designs, Inc., or FinD, has decided that the optimal capital structure for their company would be: 25% debt, 15% preferred stock, and 60% common equity. FinD's federal-plus-state tax rate is 40%, and investors expect future earnings and dividends to grow at a constant rate of 9%. FinD paid a dividend of $3.60 per share last year, and its stock currently sells for $54.00 per share. FinD can obtain new capital in the following ways: (1) New preferred stock with a dividend of $11.00 can be sold to the public at a price of $95.00 per share. (2) Debt can be sold at an interest rate of 12%. 1. Determine the after-tax cost of debt. 2. Calculate the cost of preferred stock. 3. Compute for the cost of common equity. 4. Calculate the WACC. 5. Suppose FinD has five independent projects as investment opportunities with the following costs and rates of return: (A) 17.4%; (B) 16.0%; (C) 14.2%; (D) 13.2%; and (E) 12%. Assuming FinD does not want to issue new common stocks, which projects should FinD accept? Why?
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