Logo
Home Study Material Contact Search
AI Chat FREE
  1. business
  2. finance
  3. paul altero has gone public with his bubbakoos bur

Paul Altero has gone public with his Bubbakoos Buritos restaurant chain. His current capital structure is...

Free

60.1K

Verified Solution

Question

Finance

Paul Altero has gone public with his Bubbakoos Buritosrestaurant chain. His current capital structure is as follows:10,000 shares of common stock at $20 per share at a cost of 14%;3,200 shares of preferred stock at $40 per share at a cost of 11%;and 600 bonds at $980 each at a before-tax cost of 9%. If hiscorporate tax rate is 25%, what should be the company’s requiredrate of return?

Answer & Explanation Solved by verified expert
4.2 Ratings (847 Votes)

Total amount of common stocks outstanding = 10000*20
= $200,000.00
Total amount of Preferred stocks outstanding = 3200*40
= $128,000.00
Total amount of debt outstanding = 600*980
= $588,000.00
After tax cost of debt ({because we get tax benefit on interest expense) = Cost before tax *(1-taxrate)
= 9%*(1-0.25)
= 0.0675 or 6.75%
Total capital = Total common stock+total prefered stock+total debt
= $200,000+$128,000+$588,000
= $916,000.00
Required rate of return (cost of capital) = (amount of common stock*cost of common stock)+(amount of preferred stock*cost of preferred stock)+(amount of debt*after tax cost of debt)]/total capital
= [(200,000*14%)+(128,000*11%)+($588,000*6.75%)]/916,000
= (28,000+14,080+39,690)/916,000
= 81,770/916,000
= 0.0893 or 8.93%
Please upvote if you like the answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:
  • Unlimited Question Access with detailed Answers
  • Zin AI - 3 Million Words
  • 10 Dall-E 3 Images
  • 20 Plot Generations
  • Conversation with Dialogue Memory
  • No Ads, Ever!
  • Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!
Become a Member

Transcribed Image Text

Paul Altero has gone public with his Bubbakoos Buritosrestaurant chain. His current capital structure is as follows:10,000 shares of common stock at $20 per share at a cost of 14%;3,200 shares of preferred stock at $40 per share at a cost of 11%;and 600 bonds at $980 each at a before-tax cost of 9%. If hiscorporate tax rate is 25%, what should be the company’s requiredrate of return?

Other questions asked by students

Physics
1.2K views

1 The total energy of an electron in an atom in an orbit is 3...

Physics
1.2K views

For radial function angular function correct option is are A R r determine size of...

Finance
1.2K views

How is The Federal Open Market Committee chosen and what is their job?

Biology
1.2K views

discussed two different methods of energetic coupling between exergonic and endergonic reactions. In your own words, describe...

Medical Sciences
1.2K views

What Happens in Lymphopoeisis in the embryo up until the lymphocyte maturation stage. Please give a...

Statistics
1.2K views

A card is selected at random from a standard deck of 52 playing cards Find...

Algebra
1.2K views

16 Find the degree leading coefficients and the maximum number of real zeros of the...

Algebra
1.2K views

IV y 1 3 3 Suppose that the point x y is in the indicated...

Algebra
1.2K views

2 3 DIFFERENT METHODS OF PROOF In this section we shall consider three different strategies...

Accounting
1.2K views

Use the information above to calculate this companys cash flows from operating activities using the...

Accounting
1.2K views

Charlies Wood Works produces wood products (e.g., cabinets, tables, picture frames, and so on). Production...

Accounting
1.2K views

Hello Entertainment Limited is listed on the JSE securities exchange and owns the following intangible...