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.
Question 2
Office Clean Corporation has a capital structure consisting of 30 percent debt and 70 percent common equity.
Assuming the capital structure is optimal, what amount of total investment can be financed by a 35 million
addition to retained earnings without selling new common stock?
Mars's average distance from the Sun is roughly 230 million km (1.5 AU) and its orbital period
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