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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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any constituent who has a claim in some aspect of a company's products, operations, markets, industry, or outcomes is known as w
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Greyon spinning Mills Inc. owns 600 spinning machines out of these, only 500 are used in a given year. Given this information, t
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By 2015, the foreclosure rate was down by 20%. The metropolitan statistical areas showing the highest percentage of improvement
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<h3>What is foreclosure rate?</h3>

The process of foreclosure starts when a borrower is unable to make their mortgage payments. When a mortgage is foreclosed, the lender normally seizes the property and makes an effort to sell it. This occurs when real estate is utilised as security for mortgage loans, making your house a form of security.

The given are the ways to avoid Foreclosure-

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The complete question is -

By 2015, the foreclosure rate was down by 20%. The metropolitan statistical areas showing the highest percentage of improvement included all of the following EXCEPT

A) Los Angeles.

B) Miami.

C) Washington, D.C.

D) Atlanta.

Washington, D.C.

6 0
1 year ago
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