Question

1. Sixer's has a marginal tax rate of 34%. The firm recently paid a cash dividend of $6.00 to its common stockholders. Earnings and dividends are expected to grow at 4% per year for the foreseeable future. If the firm issues new common stock, the shares should sell for $30 each. Flotation costs will amount to $2.00 per share. What would be the firm's cost of external equity?
2. Big Bob Corporation has a present capital structure consisting of common stock (10 million shares) and debt ($140 million, 6% coupon rate). The company needs to raise $46 million and is undecided between two financing plans.  Plan A: Equity financing. Under this plan, an additional common stock will be sold at $15 per share.  Plan B: Debt financing. Under this plan, the firm will issue 10% coupon bonds.  At what level of operating income (EBIT) will the firm be indifferent between the two plans? Assume a 40% marginal tax rate.
3. Your dad will give you the following amounts at the end of the stated year: Year 2: $4,000 Year 4: $6,000 Year 6: $10,000 Year 8: $12,000  Instead of spending the money, you decide to put it in account earning 16%.  How much will you have at the end of year 12?

Answer 1

Hi, As per the HOMEWORKLIB RULES, in case of multiple questions, I need to solve the first question.

The cost of external equity is computed as shown below:

= [ Dividend paid x (1 + growth rate) / [ (current price - flotation cost) ] ] + growth rate

= [ $ 6 x 1.04 ] / [ $ 30 - $ 2 ] + 4%

= ($ 6.24 / $ 28) + 4%

= 26.29% Approximately

I request you to please post remaining questions separately, since as per the guidelines in case of multiple questions, I need to solve the first question.

Feel free to ask in case of any query relating to this question