Alpha Products maintains a capital structure of 45% debt and 55% common equity. To finance its capital budget for next year, the firm will sell $50 million in 12.5% debentures at par and finance the balance of its $125 million capital budget with retained earnings. Next year Alpha expects net income to grow 9% to $140 million, and dividends also are expected to increase 8% to $2.50 per share and to continue growing at that rate for the foreseeable future. The current market value of Alpha's stock is $65. If the firm has a marginal tax rate of 25%, what is its weighted cost of capital for the coming year?

Alpha Products maintains a capital structure of 45% debt and 55% common equity. To finance its capital budget for next year, the firm will sell $50 million in 12.5% debentures at par and finance the balance of its $125 million capital budget with retained earnings. Next year Alpha expects net income to grow 9% to $140 million, and dividends also are expected to increase 8% to $2.50 per share and to continue growing at that rate for the foreseeable future. The current market value of Alpha's stock is $65. If the firm has a marginal tax rate of 25%, what is its weighted cost of capital for the coming year?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter12: The Cost Of Capital

Section: Chapter Questions

Problem 9P

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