Reference no: EM132517370

Question - PAX Inc. plans to raise additional fund for the acquisition of new equipment for the upcoming year. In order to finance the purchase, PAX Inc. is considering the following sources of financing:

Source I: Bonds

Issue 10-year bonds at a market price of $990. The coupon rate of the bond is 10 percent and the floatation cost is 8 percent of the par value.

Source II: Preferred Stock

Issue preferred stocks at $110 with a dividend rate of 10 percent and a floatation cost of 12 percent of the selling price.

Source III: Common Stock

Issue common stocks at $14 per share with an expected dividend of $1.30 per share. The expected growth rate is 8 percent and the floatation cost is 5 percent of selling price.

Required -

i) Calculate the cost of financing for each source if the company's marginal tax rate is 30 percent.

ii) Which is the best source of financing that the company should choose? Why?

iii) Explain the basic cash management strategies that will possibly reduce the company's cash flow problem.