Question

Ross Inc. has a target capital structure that calls for 25% debt, 15% preferred stock and...

Ross Inc. has a target capital structure that calls for 25% debt, 15% preferred stock and 60% common equity. The company has 25 year maturity, 7% semi-annual coupon bonds outstanding currently selling at $1,105.23. Currently, common and preferred equity in Ross is trading for $22.50 and $104.00, respectively. Ross is a relatively safe investment with a beta of 0.58 and it expects to retain $2.37 million in earnings over the coming year. Also, they are a dividend paying company, having just paid a $1.40 dividend and that is expected to grow at 2% per year; their preferred pays a dividend of 7.25% based on $100 par value. Floatation costs of 8% and 15% would have to be paid to issue new shares of preferred and common stock, respectively. The corporation is taxed at a 28% rate. Investors can invest risk free earning 2%, while investing in the market is expected to earn 14%.

(b) What is the company’s WACC if it uses retained earnings? If it uses newly issued common?

Homework Answers

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Curro Holdings Ltd has a target capital structure that calls for 25% debt, 25% preferred stock,...
Curro Holdings Ltd has a target capital structure that calls for 25% debt, 25% preferred stock, 50% common equity. The firm's before-tax cost of debt is 8.34%, the tax rate 40% and it can sell as much debt as it wishes at this rate. The firm's prefered stock currently sells for R80 per share and pays a perpetual dividend of R2.9. The firm will, however only net R68 per share from the sale of new preferred stock. It's common share...
Go Glass Berhad has a target capital structure that calls for 40 percent debt, 10 percent...
Go Glass Berhad has a target capital structure that calls for 40 percent debt, 10 percent preferred stock and 50 percent common equity. The firm's current after-tax cost of debt is 6 percent and it can sell as much debt as it wishes at this rate. The firm's preferred stock currently sells for RM9 a share and pays a dividend of RM1 per share; however, the firm will net only RM 8 per share from the sale of new preferred...
McKinsey and Sons has a target capital structure that calls for 50% debt, 10% preferred stock,...
McKinsey and Sons has a target capital structure that calls for 50% debt, 10% preferred stock, and 40% common equity. The firm can issue new 10 year debt with an annual coupon of 9% for $968.606. The firm is in a 35% tax bracket. The firm's preferred stock sells for $80 per share and pays a dividend of $10 per share; however, the firm will only net $77 per share on the sale of new preferred stock. The firm's common...
Hiland's optimal or target capital structure has the following weights: Debt 35%, Preferred Stock 15%, and...
Hiland's optimal or target capital structure has the following weights: Debt 35%, Preferred Stock 15%, and Common Stock 50%. The before tax cost of debt (or yield to maturity) is 7%. The firm's marginal tax rate is 40%. The firm has retained earnings as its primary source of common equity funding and has not incurred flotation costs. Its preferred stock if currently selling for $40 and pays a perpetual dividend of $4.00 per share. The firm is expected to grow...
) LEI has the following capital structure, which it considers to be optimal: Debt 25% Preferred...
) LEI has the following capital structure, which it considers to be optimal: Debt 25% Preferred stock 15% Common equity 60 % 100 % LEI’s tax rate is 40% and investors expect earnings and dividends to grow at a constant rate of 9% in the future. LEI paid a dividend of $3.60 per share last year, and its stock currently sells at a price of $54 per share. LEI can obtain new capital in the following ways: Preferred: New preferred...
Patton paints has a target capital structure of 60% debt and 40% equity with no preferred...
Patton paints has a target capital structure of 60% debt and 40% equity with no preferred stock. It'd before tax cost of debt is 12% and marginal tax rate is 40% . The current stock price is $22.50. The last dividend was $2.00 (Do) and is expected to grow at a constant rate of 7%. What is the cost of common equity and WACC?
Given the following information: Percent of capital structure:    Debt 25 % Preferred stock 15 Common...
Given the following information: Percent of capital structure:    Debt 25 % Preferred stock 15 Common equity 60    Additional information:   Bond coupon rate 9% Bond yield to maturity 7% Dividend, expected common $ 3.00 Dividend, preferred $ 10.00 Price, common $ 50.00 Price, preferred $ 116.00 Flotation cost, preferred $ 8.50 Growth rate 6% Corporate tax rate 30% Calculate the Hamilton Corp.'s weighted cost of each source of capital and the weighted average cost of capital. (Do not round...
Badmmans Firearms Company has the following capital structure, which it considers to be optimal: debt =...
Badmmans Firearms Company has the following capital structure, which it considers to be optimal: debt = 17%, preferred stock = 12%, and common equity = 71%. Badman’s tax rate is 35%, and investors expect earnings and dividends to grow at a constant rate of 8% in the future. Badman's expected net income this year is $395,840, and its established dividend payout ratio is 24%. Badmans paid a dividend of $6.75 per share last year (D 0 ), and its stock...
Turnbull Co. has a target capital structure of 45% debt, 4% preferred stock, and 51% common...
Turnbull Co. has a target capital structure of 45% debt, 4% preferred stock, and 51% common equity. It has a before-tax cost of debt of 11.1%, and its cost of preferred stock is 12.2%. If Turnbull can raise all of its equity capital from retained earnings, its cost of common equity will be 14.7%. However, if it is necessary to raise new common equity, it will carry a cost of 16.8%. If its current tax rate is 40%, how much...
The firm's target capital structure is the mix of debt, preferred stock, and common equity the...
The firm's target capital structure is the mix of debt, preferred stock, and common equity the firm plans to raise funds for its future projects. The target proportions of debt, preferred stock, and common equity, along with the cost of these components, are used to calculate the firm's weighted average cost of capital (WACC). If the firm will not have to issue new common stock, then the cost of retained earnings is used in the firm's WACC calculation. However, if...