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FIN - J. Ross and Sons Inc.

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Question;J. Ross and Sons Inc. has a target capital structure that calls for 50 percent debt and 50 percent common equity. The company?s only interest bearing debt is 10 year bond. The company?s 10 year long-term bonds pay 8% semiannual coupon (that is, 4% of the principal will be paid every six months) and the bonds are currently sold at $1,200 and the par of the bond is $1,000. The firm can issue bonds only $10 million at this price. Beyond this amount, the firm can issue the bond at the same price, but the firm has to pay 9% semiannual coupon (that is, 4.5% of the principal will be paid every six months). Ross expects to have $15 million retained earnings. Ross' common stock currently sells for $30 per share, but if the firm issues new common stock the firm has to pay 10% flotation costs. The firm will pay a next dividend of $2(D1=$2.00) per share on its common stock, and investors expect the dividend to grow indefinitely at a constant rate of 6 percent per year. The firm?s tax rate is 30%.The company has a very lucrative new project and the project requires $35 million. What should be the WACC for this project? To answer the question, you must calculate break points of debt and retained earnings. (10 points)

 

Paper#48584 | Written in 18-Jul-2015

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