The management of a conservative firm has adopted a policy of never letting debt exceed 30 percent of total financing. The firm will earn $10,000,000 but distribute 40 percent in dividends, so the firm will have $6,000,000 to add to retained earnings. Currently the price of the stock is $50; the company pays a $2 per share dividend, which is expected to grow annually at 10 percent. If the company sells new shares, the net to the company will be $48. Given this information, what is the: a.) cost of new common stock? The rate of interest on the firm’s long-term debt is 10 percent and the firm is in the 32 percent income tax bracket. If the firm issues more than $2,400,000, the interest rate will rise to 11 percent. Given this information, what is the: b.) cost of debt?
The management of a conservative firm has adopted a policy of never
letting debt exceed 30 percent of total financing. The firm will earn
$10,000,000 but distribute 40 percent in dividends, so the firm will have
$6,000,000 to add to
is $50; the company pays a $2 per share dividend, which is expected to
grow annually at 10 percent. If the company sells new shares, the net to
the company will be $48. Given this information, what is the:
a.) cost of new common stock?
The rate of interest on the firm’s long-term debt is 10 percent and the
firm is in the 32 percent income tax bracket. If the firm issues more than
$2,400,000, the interest rate will rise to 11 percent. Given this information,
what is the:
b.) cost of debt?
![](/static/compass_v2/shared-icons/check-mark.png)
Trending now
This is a popular solution!
Step by step
Solved in 2 steps with 3 images
![Blurred answer](/static/compass_v2/solution-images/blurred-answer.jpg)
![Essentials Of Investments](https://compass-isbn-assets.s3.amazonaws.com/isbn_cover_images/9781260013924/9781260013924_smallCoverImage.jpg)
![FUNDAMENTALS OF CORPORATE FINANCE](https://www.bartleby.com/isbn_cover_images/9781260013962/9781260013962_smallCoverImage.gif)
![Financial Management: Theory & Practice](https://www.bartleby.com/isbn_cover_images/9781337909730/9781337909730_smallCoverImage.gif)
![Essentials Of Investments](https://compass-isbn-assets.s3.amazonaws.com/isbn_cover_images/9781260013924/9781260013924_smallCoverImage.jpg)
![FUNDAMENTALS OF CORPORATE FINANCE](https://www.bartleby.com/isbn_cover_images/9781260013962/9781260013962_smallCoverImage.gif)
![Financial Management: Theory & Practice](https://www.bartleby.com/isbn_cover_images/9781337909730/9781337909730_smallCoverImage.gif)
![Foundations Of Finance](https://www.bartleby.com/isbn_cover_images/9780134897264/9780134897264_smallCoverImage.gif)
![Fundamentals of Financial Management (MindTap Cou…](https://www.bartleby.com/isbn_cover_images/9781337395250/9781337395250_smallCoverImage.gif)
![Corporate Finance (The Mcgraw-hill/Irwin Series i…](https://www.bartleby.com/isbn_cover_images/9780077861759/9780077861759_smallCoverImage.gif)