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ladessa [460]
3 years ago
5

Southern Corporation has a capital structure of 40% debt and 60% common equity. This capital structure is expected not to change

. The firm's tax rate is 34%. The firm can issue the following securities to finance capital investments:
Debt: Capital can be raised through bank loans at a pretax cost of 8.5%. Also, bonds can be issued at a pretax cost of 10%.
Common Stock: Retained earnings will be available for investment. In addition, new common stock can be issued at the market price of $59. Flotation costs will be $3 per share. The recent common stock dividend was $3.15. Dividends are expected to grow at 7% in the future.
What is the cost of capital if the firm uses bank loans and retained earnings?
a. 9.9%
b. 10.3%
c. 12.6%
d. 11.8%
e. 10.4%
Business
1 answer:
Scorpion4ik [409]3 years ago
6 0

Answer:

so cost of capital =  9.9 %

correct option is a 9.9%

Explanation:

given data

capital structure = 40%

common equity = 60%

tax rate = 34%

pretax cost = 8.5%

pretax cost = 10%

market price = $59

Flotation costs = $3 per share

common stock dividend = $3.15

Dividends expected to grow = 7%

to find out

cost of capital if the firm uses bank loans and retained earnings

solution

cost of retained earning = \frac{dividend* ( 1+growth rate )}{stock price} + growth rate       ........................1

cost of retained earning = \frac{3.15 * ( 1+0.07)}{59} + 0.07

cost of retained earning =0.1271271186

and

cost of capital will be

cost of capital = weight for debit × ( cost of debit  × ( 1 - tax rate ) ) + weight for common stock × cost of common stock

cost of capital = 0.40 × ( 8.5% × ( 1 - 0.34 ) ) + 0.60 × 0.1271271186

cost of capital =  0.0987

so cost of capital =  9.9 %

correct option is a 9.9%

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Answer:

$5572500

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3 0
3 years ago
Chang Corporation issued $6,000,000 of 9%, ten-year convertible bonds on July 1,2017 at 96.1 plus accrued interest. The bonds we
Nataly_w [17]

Answer

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Step-by-step explanation:

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5 0
3 years ago
Which of the following bases of power emphasizes threatening or actual punishment?
gizmo_the_mogwai [7]
<h2>Hello!</h2>

The answer is C. Coercive.

<h2>Why?</h2>

According to the bases of power, coercive power means that someone can punish someone who deserves it when it's needed, punishment can be just punishment but it can also mean serious actions as demoting, restricting privileges or in the last instance, firing people.

Coercive power can be a problem if it's applied to everyone, every time, the result of coercive actions applied in an inappropriate way could result in useful people resignations. That's why coercive tools are the last resort if corrections are needed.

Have a nice day!

6 0
3 years ago
Read 2 more answers
Riverrun Co. provides medical care and insurance benefits to its retirees. In the current year, Riverrun agrees to pay $13,500 f
gtnhenbr [62]

Answer:

Dr. Employee Benefits expense                    $22,700

Cr. Medical Insurance payable                      $13,500

Cr. Employee retirement program payable  $9,200

Explanation:

The cost of fringe benefit provided to the employee of the company and any tax component attached to it is known as the employee benefit expense.

Total employee benefit expense is the sum of medical insurance and employee retirement program. As medical insurance and retirement program is payable until now so, it is recorded as a liability.

Employee benefit expense = $13,500 + $9,200 = $22,700

3 0
3 years ago
An FHA-insured loan in the amount of $157,500 at 5.5% for 30 years closed on July 17. The first monthly payment is due on Septem
uranmaximum [27]

Answer:

the amount of the interest adjustment is $336.875

Explanation:

The computation of the amount of the interest adjustment is as follows;

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= $336.875

Hence, the amount of the interest adjustment is $336.875

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6 0
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