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    Financial Institutions, Investments, and Management

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    3. Sun Instruments expects to issue new stock at $34 a share with estimated flotation costs of 7 percent of the market price. The company currently pays a $2.10 cash dividend and has a 6 percent growth rate. What are the costs of retained earnings and new common stock?
    4. A firm's current balance sheet is as follows:
    Assets $100 Debt $10
    Equity $90
    . What is the firm's weighted-average cost of capital at various combinations of debt and equity, given the following information?
    Debt/Assets After-Tax Cost of Debt Cost of Equity Cost of Capital
    0% 8% 12% ?
    10 8 12 ?
    20 8 12 ?
    30 8 13 ?
    40 9 14 ?
    50 10 15 ?
    60 12 16 ?
    a. Construct a pro forma balance sheet that indicates the firm's optimal capital structure. Compare this balance sheet with the firm's current balance sheet. What course of action should the firm take?
    Assets $100 Debt $?
    Equity $?
    b. As a firm initially substitutes debt for equity financing, what happens to the cost of capital, and why?
    c. If a firm uses too much debt financing, why does the cost of capital rise?

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    Solution Preview

    See the attached file. Thanks

    Question3:
    Sun Instruments expects to issue new stock at $34 a share with estimated flotation costs of 7 percent of the market price. The company currently pays a $2.10 cash dividend and has a 6 percent growth rate. What are the costs of retained earnings and new common stock? A firm's current balance sheet is as follows:
    Cost of retained earnings =D0*(1+g)/P0+g
    12.55%

    Cost of new equity = Cost of retained ...

    Solution Summary

    Financial institutions are examined. The investment and management strategies are determined.

    $2.19

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