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Bennett Company is planning to launch a major expansion program which will require $2 million. The firm wants to maintain its current capital structure: debt = 40%, preferred stock = 20%, and common equity = 40%. New bonds will have an after-tax cost of 5.25 percent. New $100 par preferred stock will have a 8 percent dividend yield and will be sold to net the firm $98/share. Common stock with a current market price of $50 can be sold to net the firm $45 per share. The firm currently pays a $2 dividend and plans to increase its dividend at the constant rate of 6 percent per year. The retained earnings available to the expansion program are estimated to be $200,000.

a. To maintain the current capital structure, how much of the capital budget should be financed by external equity?

b. Determine the cost of each individual component.

c. Compute the WMCC.

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M947425

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