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1) Y Corporation needs to raise capital to purchase new equipment for its research laboratory
1) Y Corporation needs to raise capital to purchase new equipment for its research laboratory. Use the following information to compute the WACC for Y Corporation.
Equity financing = P200,000
Cost of equity = 10%
Debt financing = P400,000
Cost of debt = 5%
Tax rate = 30%
Express answer in %, Round off up to one decimal place (ex. 2.2%, 5.7%)
2) Spidey tools issued new preferred shares which sold for P85 in the stock market. Holders of the stock will receive an annual dividend of 9.35. Assuming flotation cost of 6% and tax rate of 30%, compute the cost of preferred equity of Spidey Tools?
3) IJ Company established a target capital structure of 40% debt, 60% common equity. The market price of the firm's stock is P30 and last dividend was 2.20 per share. It is expected that growth rate is 8%. What will be IJ's marginal cost of retained earnings?
Expert Solution
1) Please see the attachment.
2) Computation of Cost of Preferred Stock:
Cost of Preferred Stock = Dividend/(Price of Preferred Stock - Flotation Cost)
= 9.35/(85-5.10)
= 9.35/79.90
Cost of Preferred Stock = 11.70%
Workings:
Flotation Cost = 85*6% = 5.10
3) Computation of Marginal Cost of Retained Earnings:
Marginal Cost of Retained Earnings = (Dividend for Next Period / Current Price) + Growth Rate
= (2.2*(1+8%)/30) + 8%
= (2.376/30) + 8%
= 7.92% + 8%
Marginal Cost of Retained Earnings = 15.92%
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