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A company has an optimal capital structure of 35% debt financing, 15% preferred stock financing, 50%...

A company has an optimal capital structure of 35% debt financing, 15% preferred stock financing, 50%

    common equity financing. The tax rate is 25%, the preferred stock dividend is $2 per share, next period’s

    common stock dividend is $1 per share and is expected to grow by 5% in future years, the price of the

    company’s common stock is $10, the price of the company’s preferred stock is $25, the bond coupon rate

    is 4%. Assume that retained earnings is the only source of common equity financing. [15 points]

a. Calculate the weighted average cost of capital.

                                                                                                                                                                              

                  b. Suppose the operating profitability ratio is 5% and the capital requirement ratio is 55%. Calculate

                  the return on invested capital.

                                                                                                                                                                                      

                                                                                                                                                                                

c. Is the Economic Value Added positive, negative, or zero for this company?

                                                                                                                                                                        

                                                                                                                                                                                

d. Referring to your answers to parts a, b and c, do you anticipate that the stock price of this company

                  will increase or decrease

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Expert Solution

ekkarill92 answered 2 years ago
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