b. Electronic Enterprises Limited (EEL) has the following capital structure that it considers optimum. ...
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Finance
b. Electronic Enterprises Limited (EEL) has the following capital structure that it considers optimum.
Debt 25%
Preferred Stock 15%
Common Equity 60%
EEL expected net income this year is $ 34,285.72. Its established dividend payout ratio is 30% and its in the tax bracket of 40%. The investors expect its earnings and dividends to grow at a constant rate of 9% in future. EEL paid a dividend of $3.6 per share last year and its stock currently sells at a price of $60 per share. EEL can obtain capital in the following ways New common stock has a floatation cost of 10% on the par value Preferred stock with a dividend of $ 11 per share can be sold to the public at a price of $100 per share, however floatation costs will be $5 per share Debt can be sold up to $ 5000 at 12% pretax and additional debt up to $10,000 will be sold at 14%. Any debts above 10,000 will be sold at 16%
Required
Calculate the cost of component capital below (7 Marks)
Retained Earnings
New Common Equity
Preferred Stock
Debt
2. Determine Breaks in MCC Schedule and related WACC. (7 Marks)
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