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Homework answers / question archive / The Happy Company have an optimal capital structure that consists of 40% debt and 60% common equity
The Happy Company have an optimal capital structure that consists of 40% debt and 60% common equity. They expect to have $30,000,000 of new retained earnings available for investment for the next year.
• BONDS. Their investment bankers assure them that they could issue $8,000,000 (net of flotation costs) of $1000 face value bonds carrying a 10% coupon rate, paying annual interest, having a 10-year maturity, at a price of $900. Flotation costs for this issue would be $50 per bond. Bonds issued beyond $8,000,000 will have a flotation cost of $100 per bond, a price of $900, a 10% coupon rate, and a 10-year maturity.
• COMMON STOCK. The current stock price is $60. The dividend paid yesterday was $9 per share. Dividends are expected to grow at a rate of 6%, forever. New shares of stock can be issued at $60 per share and flotation costs would be $3 per share.
• The Happy Company have a corporate tax rate of 30%.
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