Rolodex Inc would like to estamate its average cost of capital for the coming ye

Sunday July 31, 2022

Rolodex Inc would like to estamate its average cost of capital for the coming year. The Capital budgeting plans call for funds totaling $200 million for the coming year. These funds will be raised from long-term debt preferred stock and common equity in the same proportions as their book values in thr firms balance sheet shown below:Current assets $110 Fixed assest $260= total assets$370. Accounts payable %30 Other current liabilities $20 long term debt $128 Preferred stock $32 Common stock (20milion shares at par) $20 Contributed capital in excess of par $30 Retained earnings $100 Total liabilities $370.1. Rolodex maximum borrowing is $80million from its bank at a pretax cost of 13% 2. Preferred stock can be issued at a pretax cost of 16.5%. 3. Rolodex expects to generate $140million in net income. Any earnings remaining after meeting the equity portion of the $200million capital expenditure budget will be paid out as dividends. 4. Rolodex marginal tax rate is 40%.


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