1. Newington Chemicals has planned capital expenditures of $1,600,000 for the coming fiscal year. The
$1,600,000 is to be financed in the following way:
Debt $600,000
Preferred Stock 200,000
Common Equity 800,000
The bonds have a coupon rate of 13.5% and will sell for par value. The preferred stock is 10%, $100 par.
It sells for par value with $4 per share flotation costs. The common stock of the company sells for $40 per
share with flotation costs of $5.00 per share. It is expected to pay a $3 dividend in the coming year, up 8%
from this year. The company's earnings, dividends, and stock price are expected to grow at about 8%
indefinitely. The company's tax rate is 40%. The Net Income for the Company this year is expected to be
$1,200,000. The dividend payout ratio is 60%. Assume the beginning retained earnings balance = 0.
a) How will the common equity funds of $800,000 be financed?
1) Retained Earnings
2)Common Stock
b) Calculate the breakpoint for common equity
c) Calculate the cost of capital for each of the components:
1)Debt______________
2)Preferred Stock_______________
3)Retained Earnings_______________
4)Common Stock_______________
d) Calculate the WACC_________
$1,600,000 is to be financed in the following way:
Debt $600,000
Preferred Stock 200,000
Common Equity 800,000
The bonds have a coupon rate of 13.5% and will sell for par value. The preferred stock is 10%, $100 par.
It sells for par value with $4 per share flotation costs. The common stock of the company sells for $40 per
share with flotation costs of $5.00 per share. It is expected to pay a $3 dividend in the coming year, up 8%
from this year. The company's earnings, dividends, and stock price are expected to grow at about 8%
indefinitely. The company's tax rate is 40%. The Net Income for the Company this year is expected to be
$1,200,000. The dividend payout ratio is 60%. Assume the beginning retained earnings balance = 0.
a) How will the common equity funds of $800,000 be financed?
1) Retained Earnings
2)Common Stock
b) Calculate the breakpoint for common equity
c) Calculate the cost of capital for each of the components:
1)Debt______________
2)Preferred Stock_______________
3)Retained Earnings_______________
4)Common Stock_______________
d) Calculate the WACC_________