Last year Gator Getters, Inc had $50 million in total assets. Management desires to increase its plant and
equipment during the coming year by $12 million.
The company plans to finance 40 percent of the expansion
with debt and the remaining 60 percent with equity capital. Bond financing will be at a 9 percent rate and will
be sold at its par value. Common stock is currently selling for $50 per share, and flotation costs for new common
stock will amount to $5 per share. The expected dividend next year for Gator is $2.50. Furthermore, dividends
are expected to grow at a 6 percent rate far into the future. The marginal corporate tax rate is 34 percent.
Internal funding available from additions to retained earnings is $4,000,000.
a. What amount of new common stock must be sold if the existing capital structure is to be maintained?
b. Calculate the weighted marginal cost of capital at an investment level of $12 million.
a.
Equity needed = $12 million × 0.6 = $7.2 million
Less additions to R/E 4.0 million
New common stock $3.2 million
b.
Kd = 9(1 - .
You might also like to view...
Among the organizational cultures thought to enhance business performance, the ______ perspective assumes that the strength of a corporate culture is related to a firm's long-term financial performance.
A. market B. strength C. fit D. objective E. adaptive
An accountant is uncertain about the best estimate of an amount for a business transaction. If two amounts are about equally likely, the amount least likely to overstate assets and income is selected. Which of the following qualities is characterized by this action?
a. Comparability b. Conservatism c. Materiality d. Neutrality
How does the individualism/collectivism dimension of culture affect team work?
a. Collectivists are easier to organize into teams. b. Collectivists are not as competitive with outside groups. c. Individualists have difficulty resisting conformity pressure. d. Collectivists are more comfortable confronting other team members.
Tim has been approached by Kent regarding the payment of Tim's credit card bill. Kent says he is acting on behalf of the bank to get assurance that Tim will pay the bill within a specific period of time
Kent is an outside agent who is not an employee of the bank. Which of the following legislations has the bank violated by contracting Kent to contact Tim? A) Fair Credit Reporting Act B) Fair and Accurate Credit Transactions Act C) Fair Credit and Charge Card Disclosure Act D) Fair Debt Collection Practices Act