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Tapley Inc.'s current (target) capital structure has a target debt ratio (D/TA) of 60 percent. The firm can raise up to $5 million in new debt at a before-tax cost of 8 percent. If more debt is required, the initial cost will be 8.5 percent, and if more than $10 million of debt is required, the cost will be 9 percent. Net income for the previous year was $10 million, and it is expected to increase by 10 percent this year. The firm expects to maintain its dividend payout ratio of 40 percent on the 1 million shares of common stock outstanding. If it must sell new common stock, it would encounter a 10 percent flotation cost on the first $2 million, a 15 percent cost if more than $2 million but less than $4 million is needed, and a 20 percent cost if more than $4 million of new outside equity is required. Tapley's tax rate is 30 percent, and its current stock price is $88 per share. If the firm has an unlimited number of projects which will earn a 10.25 percent return, what is the maximum capital budget that can be adopted without adversely affecting stockholder wealth?
Suppose the Knight Corporation is considering the acquisition of Day, Inc. The expected earnings per share for the Knight Corporation will be $4.00 with or without the merger. Calculate the coefficient of variation for the Knight Corporation before..
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Cumberland Furniture wants to establish a prearranged borrowing contract with a local commercial bank. The bank's terms for a line of credit are 3.30 percent over the prime rate, & each year the borrowing must be decreased to zero for a 30-day period..
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