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ABC's current capital structure of 60 percent equi...

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ABC's current capital structure of 60 percent equity, 30 percent debt, and 10 percent preferred stock is considered optimal. This year ABC expects to have earnings after tax of $4 million and pay dividends based on its 40% dividend pay-out ratio. ABC just paid a dividend of $2.00. Dividends have been growing at an annual compound rate of 7 percent a year and are expected to continue growing at that rate. The current market price of ABC stock is $35 and up to $2 million in new equity can be raised for a flotation cost of 10 percent. If more than $2 million is sold then the flotation cost will be 15 percent. Up to $2 million in debt can be sold at par with a coupon rate of 10 percent. An additional $3 million in debt can be sold at par with a coupon rate of 11%. Any additional debt will carry a 12 percent coupon rate and be sold at par. ABC can sell an unlimited amount of preferred stock at a pre-tax cost of 11.5%. ABC?s marginal tax rate is 40% and it has an opportunity to invest in the following capital projects. Which one(s) should be accepted? What is ABC?s optimal capital budget? (Please draw MCC and IOS curves when answering this question.) Project $ IRR A 2,000,000 0.135 B 2,500,000 0.125 C 1,500,000 0.12 D 1,250,000 0.115 E 1,000,000 0.11 F 750,000 0.105 G 500,000 0.1

 

Paper#6821 | Written in 18-Jul-2015

Price : $25
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