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##### Xhat Inc has 12,000 bonds outstanding that have a 6% coupon rate.

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**Question**

Xhat Inc has 12,000 bonds outstanding that have a 6% coupon rate. The bonds are selling at 98% of face value, pay interest semiannually, and mature in 28 years. There are 400,000 shares of 9% $100 preferred stock outstanding with a current market price of;$83 a share. In addition, there are 1.40 million shares of common stock outstanding with a market price of $54 a share and a beta of;1.2. The common stock paid a total of $1.80 in dividends last year and expects to increase those dividends by 4% annually. The;firm's marginal tax rate is 34%. The overall stock market is yielding 12% and the Treasury bill rate is 4.0%.;a. What is the cost of equity based on the dividend growth model? (2);b. What is the cost of equity based on the security market line?(2);c. What is the cost of financing using preferred stock? (2);d. What is the pre-tax cost of debt financing? (2);e. What weight should be given to equity in the weighted average cost of capital computation? (2);f. What would be the cost of new financing (for each of 28-year bonds, preferred shares and common shares), assuming that;flotation costs would be 5% of the proceeds of the issue? (12);g. If net income in the next year is expected to be $8,000,000, what would be the common equity breakpoint for new financing;assuming the current capital structure is considered optimal? (3)

Paper#32782 | Written in 18-Jul-2015

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