Questions
1. Prepare a report detailing how Ms. Zablockie found the information contained in Exhibit 26.3 . Assume the following facts:
(a) The company believes the present capital structure, consisting of long-term debt, preferred stock, and common equity is optimal.
(b) future bond issues will cost 11 percent.
(c) Future perferred issues will cost 12 percent.
(d) The common stock is currently selling for $50 per share.
(e) Flotation costs are $5 per common share.
(f) The marginal tax rate is 40 percent.
(g) Dividends are expected to be $4 per share in the coming; year and to grow at a rate of 7 percent indefinitely.
2. Answer Mr. Lee's question as to why it is necessary for a firm to calculate its cost of capital.
3. Answer Ms. Hall's question concerning retained earnings.
4. Answer Mr. Hauceford's question concerning the costs of retained earnings and common stock.
5. Answer Mr. Luther's questions concerning tax adjustments on component costs and why component costs are weighted.
6. Discuss Mr. Alter's idea of calculating a component cost and matching it against a specific capital budgeting project.
7. Assume that the firm has to raise an additional $10000000 and that debt will cost 12 percent, preferred stock 13 percent, and common stock 17.5 percent.
(a) Calculate Cobb's marginal cost of capital.
(b) Plot the marginal cost of capital from $0 to $20000000.