Last Year Gator Getters,Inc

question 74

Essay

Last year Gator Getters,Inc.had $50 million in total assets.Management desires to increase its plant and equipment during the coming year by $12 million.The company plans to finance 40 percent of the expansion with debt and the remaining 60 percent with equity capital.Bond financing will be at a 9 percent rate and will be sold at its par value.Common stock is currently selling for $50 per share,and flotation costs for new common stock will amount to $5 per share.The expected dividend next year for Gator is $2.50.Furthermore,dividends are expected to grow at a 6 percent rate far into the future.The marginal corporate tax rate is 34 percent.Internal funding available from additions to retained earnings is $4,000,000.
a.What amount of new common stock must be sold if the existing capital structure is to be maintained?
b.Calculate the weighted marginal cost of capital at an investment level of $12 million.

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Definitions:

Deposits

Funds placed into an account at a financial institution for safekeeping, which can be used for transactions or as savings.

Commission

A commission is a fee paid to an agent or employee for completing a transaction or service, usually calculated as a percentage of the sale or transaction value.

Reimbursing

The act of compensating someone for expenses they have incurred on your behalf.

Holder in Due Course

A term that refers to a party who has acquired a negotiable instrument in good faith and for value, and thus has certain rights above the original payee.