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    Zinger Corporation

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    Zinger Corporation manufactures industrial type sewing machines. Zinger Corp. received a very large order from a few European countries. In order to be able to supply these countries with its products, Zinger will have to expand its facilities. Of the required expansion, Zinger feels it can raise $75 million internally, through retained earnings. The firm's optimum capital structure has been 40% debt, 20% preferred stock and 40% equity. The company will try to maintain this capital structure in financing this expansion plan. Currently Zinger's common stock is traded at a price of $20 per share. Last year's dividend was $1.50 per share. The growth rate is 8%. The company's preferred stock is selling at $50 and has been yielding 6% in the current market. Flotation costs have been estimated at 8% of common stock and 3% of preferred stock. Zinger Corp. has bonds outstanding at 10%, but its investment banker has informed the company that interest rates for bonds of equal risk are currently yielding 9%. Zinger's tax rate is 46%.
    - a) Compute the cost of Kd, Kp, and Ke
    - b) Calculate the weighted average cost of capital

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    Solution Preview

    Zinger Corporation manufactures industrial type sewing machines. Zinger Corp. received a very large order from a few European countries. In order to be able to supply these countries with its products, Zinger will have to expand its facilities.

    Of the required expansion, Zinger feels it can raise $75 million internally, through retained earnings. The firm's optimum capital structure has been 40% debt, 20% preferred stock and 40% equity. The company will ...

    Solution Summary

    This solution is comprised of a detailed explanation to compute the cost of Kd, Kp, and Ke.

    $2.19

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