Market Values

Debt 30%

Preferred 20%

Common 50%

Texas Oil expects net earnings available to common shareholders this year of $80 million, and the payout ratio will be 30 percent. The company has a marginal tax rate of 40 percent.

External Sources of Funds:

Debt: Up to $120,000,000 can be issued at an 11 percent interest rate and no flotation costs. Above that amount, the interest rate will be 14 percent.

Preferred: Up to $150,000,000 can be sold at par value ($60) to yield the investor 12 percent. Flotation costs are 4 percent on the first $150 million, then flotation costs increase to 6 percent.

Common: Current market price is $18 per share. The last dividend was $1.50 and the expected growth rate is 12 percent. Flotation costs are 8 percent.

As one of the deputies to the Chief Financial Officer of Texas Oil, should the expansion program be undertaken?