What would the the new returns be preferred stock

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Reference no: EM131134869

Module Spreadsheet Saint Leo

Saint Leo Manufacturing is going to introduce a new product line and to accomplish this. It has four projects analyzed in which it wants to invest a total of $100 million. Your job is to find what it will cost to raise this amount of capital and based on the cost of capital determine which of the projects should be accepted by the firm to invest in.

PROJECTS

A B C D

INVESTMENT $30,000,000 $20,000,000 $25,000,000 $25,000,000

EXPECTED RETURN 10.00% 14.00% 11.50% 16.00%

The firms capital structure consists of: FMV

CAPITAL PERCENTAGE AMOUNT

DEBT 30% $15,000,000

PREFERRED STOCK 10% $5,000,000

COMMON STOCK 60% $30,000,000

$50,000,000

Other information about the firm:

CORPORATE TAX RATE 30%

DEBT

CURRENT PRICE $1,050.00

ANNUAL INTEREST 6.00% CURRENT INTEREST PAID SEMIANNUALLY

ORIGINAL MATURITY 25 YEARS, BUT NOW 20 YEARS LEFT

MATURITY VALUE $1,000.00

FLOTATION COST INSIGNIFICANT

MARKET YIELD PROJECTED:

UP TO $20 MILLION 9%

ABOVE $20 MILLION 12% 3 % additional premium

PREFERRED

CURRENT PRICE $45.00

LAST DIVIDEND (D0) $3.38 FIXED AT 7.5% OF PAR

FLOTATION COST $1.50

NEXT DIVIDEND (D1) $3.38

COMMON

CURRENT PRICE $35.00

LAST DIVIDEND (D0) $1.00

RETAINED EARNINGS $10,000,000

GROWTH RATE (g) 9%

FLOTATION COST $1.50

NEXT DIVIDEND (D1) $1.090

NOTE - Once retained earnings is maxed out new common stock will need to be issued.

Any preferred stock would be new preferred stock. You may want to review case in chapter 11.

REQUIRED:

In all of the required parts one part builds on the previous part. If you can't do a part use the set of other numbers to solve the next part.

a. What is the current Kd, Kp and Ke assuming no new debt or stock?

b. Since any new capital investment will require issuing new perferred stock, what would the the new returns be preferred stock (knp) and the new cost of capital?

c. What amount of increase (marginal cost of capital) in capital structure will the firm run out of retained earnings and be forced to issue new common stock?

d. If new common stock has to be issued what will the new return required be (Kne) and the new cost of capital?

Reference no: EM131134869

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