Learning Goal: I’m working on a article writing multi-part question and need an explanation and answer to help me learn.
Pickerington Communications Inc. (PCI) has developed a powerful server that would be used for the company’s internet activities. The company has the following capital structure, which is considered optimal. Debt is 30%, preferred stock is 10%, and common stock is 60%. PCI’s tax rate is 25%, and investors expect earnings and dividends to grow at a constant rate of 6% in the future. The company paid a dividend of $3.70 per share last year (D0), and its stock currently sells at a price of $60 per share. Ten-year Treasury bonds yield 6%, the market risk premium is 5%, and PCI’s beta is 1.3.
The following information is available for managerial finance analysis:
Preferred stock: New preferred stock could be sold to the public at a price of $100 per share, with a dividend of $9. Flotation costs per share is $5.
Debt: The company’s long-term debt has a yield to maturity of 9% i.e., the before-tax cost of debt is 9%.
Common stock: All common stock will be raised internally by reinvesting earnings.
i. the tax rate remains at 25%
ii. the tax rate reduces to 20%
iii. the tax rate increases to 35%
The company’s management is meeting today to discuss ways to minimize its cost of capital.
Submit your answers in a Word document.
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