Your firm has the following financing outstanding.
Debt: 50,000 units of 8%, 25-year bonds at a net price of $1198.00.
Preferred Stock: 120,000 shares of 8.5%, $100 preferred stock at a net issue price of $112.
Common Stock: 2,000,000 shares of common stock with a Beta of 1.1 and a net price of $65.
Retained Earnings: $96,660,000.
Market: tax rate = 40%, MRP (market risk premium) = 9%, Rf (risk free rate) = 3.1%.
If this firm’s target optimal capital structure were 50/50, and it had expansion opportunities worth $90 million, demonstrate with provided data support for your answer to both or either of these questions.
a. Is this firm currently operating within its optimal capital structure?
b. Why is it not necessary for this firm to finance the expansion with its target capital structure [of perhaps 50/50], but could finance these opportunities with 100% Equity? Why is it not necessary for this firm to finance the expansion with its target capital structure [of perhaps 50/50], but would find it recommended to finance these opportunities with 100% Debt?