In order to get rich you have started your own business college which you have n

Question

In order to get rich you have started your own business college which you have named BCU (Big Cashflow University). It is very successful because no classes start before 10:00 in the morning, there is a swimming pool and bar in the business building, and there are no exams. You will issue bonds to raise 50% of your future capital at a pre-tax cost of 9%. 10% of your capital will come from preferred stock that will cost 11%. 40 % of your capital will come from equity which you estimate will cost 15% at the current stock price of $25 per share. You personally own 100 shares of stock in your company. Your company has $800,000 of internally generated funds and has identified $1,000,000 of profitable projects. If your company uses a

Explanation / Answer

internally generated funds = $800,000

profitable projects = $1,000,000

according to residual model : dividend = earnings - funds used for capital expenditures

capital that can be raised = 1,000,000

50% of 1,000,000 = 500,000

10% of 1,000,000 = 100,000

40% o f1,000,000 = 400,000

debt is @ 9%. therefor 9% of 800,000 = 72000

remaining = 800,000 - 72000 = 728000

preferred stock @ 11% hence 11% of 728000 = 80080

hence remaining balance is for equity(common) stock holders = 728000-80080 = $647,920

hence dividend cash that can be paid = $647,920

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