Lukas Films Industries has a capital structure consisting of 60% common stocks and 40% of debt. The firm ́s investment banker has advised the firm that debt issued with a $1.000 par value, 8% coupon (interest paid semiannually), maturing in 20 years can be sold today in the bond market for $1.100. Common stock of the firm is currently selling for $80.00 per share. The firm expects to pay a $2 dividend per year. Dividend have grown at the rate of 8% per year and are expected to continue to do for the foreseeable future. a) What is Lucas Films‘ weighted average cost of capital where the firm faces a tax rate of 34%? b) What should be the cost of the debt so that the previously calculated (section a) if WACC is reduced by 20% keeping the rest of the variables constant?

Lukas Films Industries has a capital structure consisting of 60% common stocks and 40% of debt. The firm ́s investment banker has advised the firm that debt issued with a $1.000 par value, 8% coupon (interest paid semiannually), maturing in 20 years can be sold today in the bond market for $1.100. Common stock of the firm is currently selling for $80.00 per share. The firm expects to pay a $2 dividend per year. Dividend have grown at the rate of 8% per year and are expected to continue to do for the foreseeable future. a) What is Lucas Films‘ weighted average cost of capital where the firm faces a tax rate of 34%? b) What should be the cost of the debt so that the previously calculated (section a) if WACC is reduced by 20% keeping the rest of the variables constant?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter12: The Cost Of Capital

Section: Chapter Questions

Problem 17P

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