question archive The Gifts R’ Us Inc
The Gifts R’ Us Inc
Subject:FinancePrice: Bought3
The Gifts R’ Us Inc. (GRU) is expecting a substantial jump in sales and needs to add $6 million in assets. Its current balance sheet is shown below. Its current operations are expected to add $1,750,000 to retained earnings during the coming yearCash750,000Accounts Payable2,000,000Accounts Receivable3,000,000Notes Payable1,500,000Inventory1,500,000 Current Liabilities3,500,000 Current Assets5,250,000Long-term Debt (6%)7,000,000Net Fixed Assets15,000,000Preferred Stock2,000,000Common Stock and Retained Earnings7,750,000Total Assets20,250,000Total Liabilities + Equity20,250,000Its current debt, originally issued at par, has a 6% coupon paid semiannually. It has 12 years to maturity and has a market price of $847.53. The current preferred stock (40,000 shares outstanding) carries a dividend of $7.50 per share and is selling in the market at $87 per share. Its common stock (700,000 shares outstanding) is selling in the market at $30 per share. The company expects to pay a common stock dividend of $2.50 per share next year. The dividends are expected to grow at 6% per year for the foreseeable future.The company can sell new common stock at current market price with a flotation cost of 5%, new preferred stock with a dividend of $8 per share to net $91 per share, and new semiannual coupon bonds with a par value of $1,000 and maturity of 20 years with a coupon rate of 9% to net $1,047.69.Calculate GRU’s weighted average cost of capital assuming that the current capital structure is optimal and answer the following questions? The company’s overall tax rate is 40%.1. What percent of total new financing must come from equity funds?2. What percent of equity funds must come from new equity?3. What is the after-tax cost of debt?4. What is the after-tax cost of preferred stock?5. What is the average after-tax cost of all equity funds?6. What is the weighted average cost of capital?
