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The Morris Company is attempting to determine its costof capital in order to evaluate seve

The Morris Company is attempting to determine its costof capital in order to evaluate seve

The Morris Company is attempting to determine its costof capital in order to evaluate several proposed capital projectsand set its capital budget for next year. The following informationhas been made available:

• Target capital structure is 40% debt, 60% common stockequity

• $10 million can be borrowed at a pre-tax cost of 11%

• Additional debt will cost 14% (pre-tax) but is unlimited

• $7,500,000 of retained earnings will be generated nextyear

• Additional common equity will be raised through issuing newcommon stock (no limit foreseen)

• Morris stock currently sells for $12.00 per share

• Last year's dividend was $1.20

• Dividends are expected to grow 4% annually

• New common stock will be sold for $11.00 per share andflotation costs will be $1.00 per share

• Morris is in the 40% tax bracket

Abhinav 01-Dec-2019

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