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Comfort Corporation

The Comfort Corporation manufactures sofas and tables for the recreational vehicle market. The firm's capital structure, consist of 60 percent common equity, 10 percent preferred stock, and 30 percent long-term debt. This capital structure is believed to be optimal. Comfort will require $120 million to finance expansion plans for the coming year. The firm expects to generate enough internal equity to meet the equity portion of its expansion needs. The cost of retained earnings is 18%. The firm can raise preferred stock at a cost of 15%. First-Mortgage bonds can be sold at a pretax cost of 14%. The firm's marginal tax rate is 40 percent.
Calculate the cost of capital for the funds needed to meet the expansion goal.

Solution Preview

The Comfort Corporation manufactures sofas and tables for the recreational vehicle market. The firm's capital structure consists of 60 percent common equity, 10 percent preferred stock, and 30 percent long-term debt. This capital structure is believed to be optimal. Comfort will require $120 million to ...

Solution Summary

This solution is comprised of a detailed explanation to calculate the cost of capital for the funds needed to meet the expansion goal of the Comfort Corporation.

$2.19