# A company has a capital structure of 45% debt, 5% preferred stock

* A company has a capital structure of 45% debt, 5% preferred stock and 50% common equity.(a) The company can obtain unlimited debt at an interest rate of 10%. The marginal tax rate is 35%. Find the after-tax cost of debt.(b) Preferred stock carries a dividend of \$14 and currently sells for \$120.00. Flotation cost on preferred stock is \$10 per share. What is the cost of preferred stock?(c) Their current stock price is \$25. The next dividend is expected to be \$2.56 and growth is constant at 8%. If new common stock is issued, it will have a flotation cost of 10%. Find the cost of retained-earnings and the cost of issuing new common shares.(d) If the net income is expected to be \$1,600,000, and the company’s policy is to pay 50% of net-income for dividends, what is the break point caused by using all of retained-earnings?(e) Find the WACC using retained earnings and the WACC when new equity is issued.* A company has a WACC1=12.5% for funding up to \$4 million when retained earnings are used.They also have a WACC2=13.7% for funding above \$4 million when new equity is raised. If they have the following independent investment opportunities, which projects should the company include in their budget? What is the company’s optimal capital budget?Project A: Cost of \$2 million; IRR 20%.Project B: Cost of \$3 million; IRR 14%Project C: Cost of \$4 million; IRR 13%

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