The Ewing Distribution Company is planning a $100 million expansion of its chain of discount service stations to several neighboring states. This expansion will be financed, in part, with debt issued with a coupon interest rate of 15 percent. The bonds have a 10-year maturity and a $1,000 face value, and they will be sold to net Ewing $990 after issue costs. Ewing's marginal tax rate is 40 percent. Preferred stock will cost Ewing 14 percent after taxes. Ewing's common stock pays a dividend of $2 per share. The current market price per share is $15, and new shares can be sold to net $14 per share. Ewing's dividends are expected to increase at an annual rate of 5 percent for the foreseeable future. Ewing expects to have $20 million of retained earnings available to finance the expansion. Ewing's target capital structure is as follows: Debt 20% Preferred stock

The Ewing Distribution Company is planning a $100 million expansion of its chain of discount service stations to several neighboring states. This expansion will be financed, in part, with debt issued with a coupon interest rate of 15 percent. The bonds have a 10-year maturity and a $1,000 face value, and they will be sold to net Ewing $990 after issue costs. Ewing's marginal tax rate is 40 percent. Preferred stock will cost Ewing 14 percent after taxes. Ewing's common stock pays a dividend of $2 per share. The current market price per share is $15, and new shares can be sold to net $14 per share. Ewing's dividends are expected to increase at an annual rate of 5 percent for the foreseeable future. Ewing expects to have $20 million of retained earnings available to finance the expansion. Ewing's target capital structure is as follows: Debt 20% Preferred stock

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter12: The Cost Of Capital

Section: Chapter Questions

Problem 8P

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The Ewing Distribution Company is planning a $240 million expansion of its chain of discount service stations to several neighboring states. This expansion will be financed, in part, with debt issued with a coupon interest rate of 16 percent. The bonds have a 15-year maturity and a $1,000 face value, and they will be sold to net Ewing $973 after issue costs. Ewing’s marginal tax rate is 40 percent.Preferred stock will cost Ewing 14 percent after taxes. Ewing’s common stock pays a dividend of $6 per share. The current market price per share is $18, and new shares can be sold to net $17 per share. Ewing’s dividends are expected to increase at an annual rate of 7 percent for the foreseeable future. Ewing expects to have $60 million of retained earnings available to finance the expansion.Ewing’s target capital structure is as follows: Debt 40 % Preferred stock 5 Common equity 55 Calculate the weighted cost of capital that is appropriate to use in evaluating this…
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