ABC would like to expand and have a capital structure of 10 million preferred st

Question

ABC would like to expand and have a capital structure of 10 million preferred stock 30 million debt 60 million common equity ABC would like to expand, in order to do so they must issue new debt with a 12% coupon rate, $1,000 par value, that have 15 year maturities. The floatation costs are 2% per bond. Preferred stock will cost ABC 11 % after taxes. ABC's common stock currently sells for $22 a share and next year will pay a quarterly dividend of $0.25 per share. If the stock dividends are expected to continue to grow at a rate of 4% per year for the foreseeable future. ABC's tax rate is 35%

Explanation / Answer

Par=1000

Flotation cost=2%*1000=20

Net proceeds=1000-20=980

Coupons=12%*1000=120

Maturity=15 years

Pre-tax cost of debt=12.30%...Use RATE(15,120,-980,1000) function in excel

Weight of debt=30/(10+30+60)=0.3=30%

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.