Determine the weighted average cost of capital based

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1) Determine the weighted average cost of capital based on using retained earnings in the capital structure. The percentage composition in the capital structure for bonds, preferred stock, and common equity should be based on the current capital structure of long-term financing as shown in Figure 1 below (it adds up to $18 million). Common equity will represent 60% of financing throughout this case. Use Rollins instruments data to calculate the cost of prefer stock and debt.

2) Recomputed the weighted average cost of capital based on using the new common stock in the capital structure. The weights remain the same, only common equity is now supplied by new common stock, rather than by retained earnings. After how much new financing will this increase in the cost of capital take place determine this by dividing retained earnings by the percent of common equity in the capital structure?

3) Assume the investment banker also wishes to use the capital asset pricing model, a shown in Formula 11.5 in the text, to compute the cost (required return) on common stock. Assume Rf=6%; B is 1.25, and Km is 13%. What is the value of Kj? How does this compare to the value of Ke computed in question #1?

Reference no: EM131013377

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