AJAX INC. (Cost of debt and cost of capital)
3.AJAX INC. IS EXPECTING TO ISSUE NEW DEBT AT PAR WITH COUPON RATE OF 6% AND TO ISSUE NEW PREFERRED STOCK WITH $2.00 PER SHARE DIVIDEND AT $20.00. COMMON STOCK IS CURRENTLY SELLING FOR $25.00 A SHARE. AJAX EXPECTS TO PAY A DIVIDEND OF $2.50 PER SHARE NEXT YEAR, AND A MARKET ANALYSIS INDICATES DIVIDENDS WILL GROW AT 3% PER YEAR. THE MARGINIAL TAX RATE IS 40%.
A. WHAT IS THE COST OF DEBT, COST OF PREFERRED STOCK AND COST OF COMMON STOCK?
B. IF AJAX RAISES CAPITAL USING CAPITAL STURCTURE OF 40% DEBT, 10% PREFERRED STOCK AND 50% COMMON STOCK, WHAT IS THE COST OF CAPITAL FOR AJAX, INC.?
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