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The director for S Corp. manufacturers of playground equipment, is considering a plan to expand production...

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Finance

The director for S Corp. manufacturers of playground equipment,is considering a plan to expand production facilities in order tomeet an increase in demand. He estimates that this expansion willproduce a rate of return of 11%. The firm’s target capitalstructure calls for a debt/equity ratio of .8 . S Corp has a bondissue outstanding for that will mature in 25 years and has a 7%annual coupon rate. The bonds are currently selling for $804. Thefirm has maintained a constant growth rate of 6%. S Corp’s nextexpected dividend is $2(D1) and it current stock price is $40. Itstax rate is 21%. Should it undertake the expansion? Calculate theCost of bonds. Calculate the Cost of equity. Calculate the WACC

Answer & Explanation Solved by verified expert
4.0 Ratings (499 Votes)
DA DED DA 08108 04444 Weight of equity 1DA Weight of equity 104444 WE05556 Weight of debt DA Weight of debt    See Answer
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The director for S Corp. manufacturers of playground equipment,is considering a plan to expand production facilities in order tomeet an increase in demand. He estimates that this expansion willproduce a rate of return of 11%. The firm’s target capitalstructure calls for a debt/equity ratio of .8 . S Corp has a bondissue outstanding for that will mature in 25 years and has a 7%annual coupon rate. The bonds are currently selling for $804. Thefirm has maintained a constant growth rate of 6%. S Corp’s nextexpected dividend is $2(D1) and it current stock price is $40. Itstax rate is 21%. Should it undertake the expansion? Calculate theCost of bonds. Calculate the Cost of equity. Calculate the WACC

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