It is January 2007 This company is under some pressure and has a strict capital budget of $20 million, so they need to be careful as to which projects they choose.
Examine the following book-value balance sheet for Fairfield Office supplies for the year 2006. What is the capital structure of the firm based on market values? The preferred stock currently sells for $24 per share and the common stock for $14 per share. The preferred stock pays a dividend of $2.50 per share, the Common Stock paid a dividend of $1.25 last year, and the firm is expected to continue to grow at the same rate as the net income for the past five years, The rate on 90 day treasuries is 4.5%, the beta of the stock is 1.3, the market risk premium is 12%, and the firm's tax rate is 40%. The float costs are as follows: Debt: 10% of par, Preferred: $1 per share and Common: $.8 per share. The firm has paid out 20% of its net income as dividend in the past five years and is expected to continue. If the company borrows over $2.5 million then the cost of debt goes from 11% to 13% and if the company borrows over $5 million the cost goes to 15%. Find the Marginal costs of capital for Fairfield.
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The solution examines WACC and WMCC. The solution finds marginal costs of capital for Fairfield.