TO Incorporated is planning a large the investor 12 per expansion program during
ID: 2678556 • Letter: T
Question
TO Incorporated is planning a large the investor 12 per expansion program during the coming year and its capital budget is estimated at $180 million yielding 16%. No other projects are under consideration. TO wants to raise funds in accordance with its target capital structure:Debt: 30%
Preferred: 20%
Common: 50%
TO net earnings available to common shareholders this year of $80 million and the payout ratio will be 30%. The company has a marginal tax rate of 40%.
External Sources of Funds:
Debt: up to $120,000,000 can be issued at an 11% interest rate and no floatation costs. Above that amount, the interest rate will be 14%
Preferred: Up to $150,000,000 can be sold at par value ($60) to yield the investor 12 percent. Flotation coasts are 4 percent of the first $150 million, the floatation costs increase to 6 percent.
Common: Current market price is $18 share. The last dividend was $1.50 and the expected growth rate is 12%. Floatation costs are 8%.
As one of the deputies to the CFO, should the expansion program be undertaken? Show all computations.
Explanation / Answer
yes it should be taken because profits are much larger by 40%
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