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COST OF CAPITAL ASSIGNMENT STEPHANIE’S CAJUN FOODS, INC NEEDS TO DETERMINE THEIR COST OF CAPITAL FOR...

COST OF CAPITAL ASSIGNMENT

STEPHANIE’S CAJUN FOODS, INC NEEDS TO DETERMINE THEIR COST OF CAPITAL FOR CAPITAL BUDGETING PURPOSES. THEY HAVE ASSEMBLED THE FOLLOWING INFORMATION:

MARKET PRICE OF OUTSTANDING BONDS                                                                         95

COUPON RATE – SEMI-ANNUAL PAYMENTS                                                               11.0%

MATURITY VALUE                                                                                                             $ 1,000

YEARS TO MATURITY                                                                                                              25

FLOTATION COSTS                                                                                                                  2%

CORPORATE TAX RATE                                                                                                        21%

MARKET PRICE OF OUTSTANDING PREFERRED                                                       $      50

PAR VALUE                                                                                                                          $      25

DIVIDEND (PERCENTAGE OF PAR)                                                                                    10%

FLOTATION COSTS                                                                                                                  1%

MARKET PRICE OF COMMON STOCK                                                                      $           60

CURRENT STOCK DIVIDEND                                                                                      $        7.50

GROWTH RATE                                                                                                                      4.0%

FLOTATION COSTS                                                                                                               5.0%

TARGET CAPITAL STRUCTURE

            BONDS                                   10.00%

            PREFERRED STOCK           20.00%

            COMMON STOCK                30.00%

            RETAINED EARNINGS       40.00%

           

THE CURRENT CAPITAL STRUCTURE, BASED ON BOOK VALUES, APPEARS AS FOLLOWS:

            BONDS                                                                                   $ 20,000,000

            PREFERRED STOCK                                                                1,000,000

            COMMON STOCK (PAR $10)                                                30,000,000

            RETAINED EARNINGS                                                          80,000,000

            CALCULATE:           A)        THE COMPONENT COSTS OF CAPITAL

  1. THE WEIGHTED AVERAGE COST OF CAPITAL AT BOOK VALUE WEIGHTS
  2. THE WEIGHTED AVERAGE COST OF CAPITAL AT MARKET VALUE WEIGHTS
  3. THE WEIGHTED AVERAGE COST OF CAPITAL AT TARGET VALUE WEIGHTS

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ekkarill92 answered 2 years ago
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