"MGT 325 Module 5 Spreadsheet Exam(Saint Leo)"…Complete Assignment! Thanks

Saint Leo Manufacturing is going to introduce a new product line and to accomplish this



it has four projects analyzed in which it wants to invest a total of $100 million. Your job is to



find what it will cost to raise this amount of capital and based on the cost of capital determine which of the



projects should be accepted by the firm to invest in.







PROJECTS



A B C D



INVESTMENT $30,000,000 $20,000,000 $25,000,000 $25,000,000



EXPECTED RETURN 10.00% 14.00% 11.50% 16.00%







The firms capital structure consists of: FMV



CAPITAL PERCENTAGE AMOUNT



DEBT 30% $15,000,000



PREFERRED STOCK 10% $5,000,000



COMMON STOCK 60% $30,000,000



$50,000,000



Other information about the firm:



CORPORATE TAX RATE 30%



DEBT



CURRENT PRICE $1,050.00



ANNUAL INTEREST 6.00% CURRENT INTEREST PAID SEMIANNUALLY



ORIGINAL MATURITY 25 YEARS, BUT NOW 20 YEARS LEFT



MATURITY VALUE $1,000.00



FLOTATION COST INSIGNIFICANT



MARKET YIELD PROJECTED:



UP TO $20 MILLION 9%



ABOVE $20 MILLION 12% 3 % additional premium







PREFERRED



CURRENT PRICE $45.00



LAST DIVIDEND (D0) $3.38 FIXED AT 7.5% OF PAR



FLOTATION COST $1.50



NEXT DIVIDEND (D1) $3.38







COMMON



CURRENT PRICE $35.00



LAST DIVIDEND (D0) $1.00



RETAINED EARNINGS $10,000,000



GROWTH RATE (g) 9%



FLOTATION COST $1.50



NEXT DIVIDEND (D1) $1.090







NOTE - Once retained earnings is maxed out new common stock will need to be issued.



Any preferred stock would be new preferred stock. You may want to review case in chapter 11.







REQUIRED:







In all of the required parts one part builds on the previous part. If you can't do a part use the



set of other numbers to solve the next part.



a. What is the current Kd, Kp and Ke assuming no new debt or stock?



b. Since any new capital investment will require issuing new perferred stock, what would the



the new returns be preferred stock (knp) and the new cost of capital?



c. What amount of increase (marginal cost of capital) in capital structure will the firm run



out of retained earnings and be forced to issue new common stock?



d. If new common stock has to be issued what will the new return required be (Kne) and the



new cost of capital?







Note: All Answers Should Be Taken Out to 2 Decimal Places, Especially the Interest Rate Answers.