solution

Refer to Byron Corporation information shown in the table below. What is the maximum amount of new capital that can be raised at the lowest component cost of equity? (In other words, what is the retained eamings break point?)

Byron Corporation
Byron Corporation’s present capital structure, which is also its target capital structure, is 40 percent debt and 60 percent common equity. Next year’s net income is projected to be $20,500, and Byron’s payout ratio is 30 percent. The company’s earnings and dividends are growing at a constant rate of 6 percent, the last dividend (DO) was $2.00; and the current equilibrium stock price is $22.15. Byron can raise all the debt financing it needs at 13.0 percent. If Byron issues new common stock, a 13 percent flotation cost will be incurred. The firm’s marginal tax rate is 35 percent.
$22,360
$24.922
$22,127
$23,917
$23,525

 
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