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A company has an optimal capital structure of 35% debt financing, 15% preferred stock financing,...

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Finance

A company has an optimal capital structure of 35% debt financing, 15% preferred stock financing, 50%

common equity financing. The tax rate is 25%, the preferred stock dividend is $2 per share, next periods common stock dividend is $1 per share and is expected to grow by 5% in future years, the price of the companys common stock is $10, the price of the companys preferred stock is $25, the bond coupon rate is 4%. Assume that retained earnings is the only source of common equity financing.

a. Calculate the weighted average cost of capital.

b. Suppose the operating profitability ratio is 5% and the capital requirement ratio is 55%. Calculate the return on invested capital.

c. Is the Economic Value Added positive, negative, or zero for this company?

d. Referring to your answers to parts a, b, and c, do you anticipate that the stock price of this company will increase or decrease?

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