2B4B THE MANAGEMENT OF OLD FENSKE COMPANY (OFC) HAS BEEN REVIEWING TH...
137.
CSO: 2B4b
LOS: 2B4b
The management of Old Fenske Company (OFC) has been reviewing the company’s
financing arrangements. The current financing mix is $750,000 of common stock,
$200,000 of preferred stock ($50 par) and $300,000 of debt. OFC currently pays a
common stock cash dividend of $2. The common stock sells for $38, and dividends have
been growing at about 10% per year. Debt currently provides a yield to maturity to the
investor of 12%, and preferred stock pays a dividend of 9% to yield 11%. Any new issue
of securities will have a flotation cost of approximately 3%. OFC has retained earnings
available for the equity requirement. The company’s effective income tax rate is 40%.
Based on this information, the cost of capital for retained earnings is
a.
9.5%.
b.
14.2%.
c.
15.8%.
d.
16.0%.