The management of Final Designs, Inc., or FinD, has decided that the optimal capital structure for their company would be: 25% debt, 15% preferred stock, and 60% common equity. FinD's federal-plus-state tax rate is 40%, and investors expect future earnings and dividends to grow at a constant rate of 9%. FinD paid a dividend of $3.60 per share last year, and its stock currently sells for $54.00 per share. FinD can obtain new capital in the following ways: (1) New preferred stock with a dividend of $11.00 can be sold to the public at a price of S95.00 per share. (2) Debt can be sold at an interest rate of 12%. 1. Determine the after-tax cost of debt. 2. Calculate the cost of preferred stock. 3. Compute for the cost of common equity. 4. Calculate the WACC. 5. Suppose FinD has five independent projects as investment opportunities with the following costs and rates of return: (A) 17.4%; (B) 16.0%; (C) 14.2%; (D) 13.2%; and (E) 12%. Assuming FinD does not want to issue new common stocks, which projects should FinD accept? Why?
The management of Final Designs, Inc., or FinD, has decided that the optimal capital structure for their company would be: 25% debt, 15% preferred stock, and 60% common equity. FinD's federal-plus-state tax rate is 40%, and investors expect future earnings and dividends to grow at a constant rate of 9%. FinD paid a dividend of $3.60 per share last year, and its stock currently sells for $54.00 per share. FinD can obtain new capital in the following ways: (1) New preferred stock with a dividend of $11.00 can be sold to the public at a price of S95.00 per share. (2) Debt can be sold at an interest rate of 12%. 1. Determine the after-tax cost of debt. 2. Calculate the cost of preferred stock. 3. Compute for the cost of common equity. 4. Calculate the WACC. 5. Suppose FinD has five independent projects as investment opportunities with the following costs and rates of return: (A) 17.4%; (B) 16.0%; (C) 14.2%; (D) 13.2%; and (E) 12%. Assuming FinD does not want to issue new common stocks, which projects should FinD accept? Why?
Chapter12: The Cost Of Capital
Section: Chapter Questions
Problem 9P
Related questions
Question
Answer #5 only
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 5 steps with 4 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning