Ad Nauseum Inc. has a target capital structure of 40% debt and 60% equity. Up...
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Ad Nauseum Inc. has a target capital structure of 40% debt and 60% equity. Up to $10,000 of new debt can be issued at 12%, but any new debt will cost the firm 14%. Retained earnings for the current year are $50,000. Next year's expected dividend is $4.00, dividends are growing at 8%, and the current stock price is $20.00. If Ad Nauseum issues new common stock, the flotation costs will be 10% of the issue price. The firm's tax rate is 31%.
a) What is the break point for debt financing? b) What is the cost of new equity?
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