Happy Inc., has determined its optimal capital structure which is composed of the following sources and target market value proportions.
Debt: The firm can issue a 5-year, 10%, P10,000 face value bonds payable for a total of P11,000,000 which will sell at P11,000 but will incur P500 floatation cost.
Preferred Stock: The firm has determined it can issue P1,000 par value preferred stock at P1,500 per share for a total of P9,00000,000. The stock will pay a 10% annual dividend. The cost of issuing and selling the stock is P250 per share.
Common Stock: A firm’s common stock is currently selling for P2,500 per share. The dividend expected to be paid at the end of the coming year is P250. Its dividend payments have been growing at a constant rate of 10%, total common stock is P10,000,000. Additionally, the firm’s marginal tax rate is 30 percent.
Guldura Inc., is currently studying the feasibility of investing in a machine worth P10,000,000 which will reduce cash operating costs for P4,000,000 yearly, it will have a 3-year life and will be depreciated on a straight-line basis.
Happy Inc.’s weight of debt in the capital structure is
a. 30%
b. 33%
c. 40%
d. 37%
Happy Inc.’s weight of common stock in the capital structure is
a. 30%
b. 38%
c. 37%
d. 40%
Happy Inc.’s weight of preferred stock in the Happy structure is
a. 30%
b. 33%
c. 37%
d. 40%
Happy Inc.’s approximated before-tax cost of debt is
a. 9.11%
b. 10.12%
c. 8.78%
d. 7.68%