Owen's enterprises is in the process of determining its capital budget for the next fiscal year. The firms current capital structure, which it considers to be optimal, is contained in the following balance sheet.
Balance Sheet
- Current Assets $40,000,000 Accounts Payable $20,000,000
- Fixed Assets 400,000,000 Other Current Liabilities 10,000,000
- Total Assets $440,000,000 Long term debt 123,000,000
- Common Stock at par 15,500,000.00
- Paid in capital in excess of par 51,000,000
- Retained earnings 220,500,000
- Total Liabilities and
- Stockholders equity 440,000,000
The following information has been obtained from conversations with financial officers, and the firms investment banker and lead bank
•The firm expects net income from this year to total $80 million. The firm intends to maintain its dividend policy of paying 42.25 percent of earnings to stock holder
•The firm can borrow $18 million from its bank at a 13 percent annual rate
•any additional debt can be obtained through the issuance of debentures (at par) that carry a 15 percent coupon rate
•The firm currently pays $4.40 per share in dividends (Do). Dividends have grown at a 5% rate in the past. This growth is expected to continue.
•The firm's common stock currently trades at $4 per share. If the firm were to raise any external equity the newly issued shares would net the company $40 per share.
- The firm is in the 40% marginal tax bracket.
- Computes Owens marginal cost of capital schedule.