Calculate the cost of financing using preferred stock


Bonds - The G Company has 10,000 bonds outstanding. The bonds are selling at 101 percent of face value, have a 7 percent coupon rate, pay interest yearly, & mature in 9 years.

Preferred shares - There are 500,000 shares of 8 percent preferred stock [$100 stated value] outstanding with a current market price of $91 a share.

Common shares - In addition, there are 1.25 million shares of common stock outstanding with a market price of $63 a share and a beta of .97. The common stock paid a total of $1.20 in dividends last year and expects to raise those dividends by 3% yearly.

Other - The firm's marginal tax rate is 35 percent. The overall stock market is yielding 11% & the Treasury bill rate is 3.5 percent.

REQUIRED:

[A] Calculate the cost of financing using preferred stock?

[B] Calculate cost of equity based on the dividend growth model? Calculate the cost of equity based on the security market line? Which is more reasonable?

[C] Calculate the after tax cost of debt financing?

[D] Calculate the WACC of the Gitman Company?

[E] Suppose the above capital structure is considered optimal; next year's expected income is $10,000,000, and no change in dividend policy. Determine the amount of projects could the firm finance before needing to issue new common shares? i.e. Calculate the common equity breakpoint?

[D] Suppose a 5 percent flotation cost for each financing source, determine the marginal cost of capital (MCC) for financing above the breakpoint you determined in part e?

Request for Solution File

Ask an Expert for Answer!!
Finance Basics: Calculate the cost of financing using preferred stock
Reference No:- TGS019261

Expected delivery within 24 Hours