FIN 486 CART Become Exceptional--fin486cart.com FIN 486 Entire Course | Page 27

projected $1,300,000 of internally generated 2016 funds is expected
to be insufficient to meet the company’s expansion needs.
Management has set a policy of maintaining the current capital
structure proportions of 25% long-term debt, 10% preferred stock,
and 65% common stock equity for at least the next 3 years. In
addition, it plans to continue paying out 40% of its earnings as
dividends. Total capital expenditures are yet to be determined.
Jennings has been presented with several competing investment
opportunities by division and product managers. However, because
funds are limited, choices of which projects to accept must be made.
A list of investment opportunities is shown in Table 2. To analyze the
effect of the increased financing requirements on the weighted
average cost of capital (WACC), Jennings contacted a leading
investment banking firm that provided the financing cost data given in
Table 3. O’Grady is in the 40% tax bracket. TABLE 1 Selected
Income Statement Items TABLE 2 TABLE 3 Financing Cost Data
Long-term debt: The firm can raise $700,000 of additional debt by
selling 10-year, $1,000, 12% annual interest rate bonds to net $970
after flotation costs. Any debt in excess of $700,000 will have a
before-tax cost, rd, of 18%. Preferred stock: Preferred stock,
regardless of the amount sold, can be issued with a $60 par value and
a 17% annual dividend rate. It will net $57 per share after flotation
costs. Common stock equity: The firm expects its dividends and
earnings to continue to grow at a constant rate of 15% per year. The
firm’s stock is currently selling for $20 per share. The firm expects to
have $1,300,000 of available retained earnings. Once the retained
earnings have been exhausted, the firm can raise additional funds by
selling new common stock, netting $16 per share after underpricing
and flotation costs. TO DO: a. Over the relevant ranges noted in
the following table, calculate the after-tax cost of each source of
financing needed to complete the table. Source of capital Range of
new financing After-tax cost (%) Long-term debt $0–$700,000
_________ $700,000 and above _________ Preferred stock $0 and
above _________ Common stock equity $0–$1,300,000 _________
$1,300,000 and above _________
==============================================
FIN 486 Week 5 Individual Assignment Eboy Corporation