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[answered] Manchester Aeronautics Inc. (MAI) is presently a wholly equ


Manchester Aeronautics Inc. (MAI) is presently a wholly equity financed company. The firm desires to have the following target capital structure in its immediate future which is considered optimal for its performance:

Desired Capital Structure Type Proportion Debt 25% Preferred Stock 15% Common Equity 60%

The firm is now very stable and is set to grow at a constant rate for several years to come. The firm declares and pays a dividend of $3.60 per share for its common stock holders today, and its common stock currently sells at $54 per share. The firm?s EPS (earnings per share) was $8.40 in December 2007 and the same has grown to $16.80 this year, that is, December 2016. The firm?s corporate tax rate is 40%.

MAI can obtain new capital in the following ways:

  • Preferred Stock:New Preferred Stock with a dividend of $11.00 can be sold to the public at the par value of $100.00 per share. The firm's investment bank managing the issue will charge a 5.00% (of the par value) underwriting commission for this issue.
  • Debt (Bond):Debt can be sold to investors who will require $120.00 coupon interest per year per bond. Coupon interest paymet will be made annually. The underwriting fee for bankers on this issue is being written off as an operating expense for this year.

Assume that the firm is successful in raising the required capital. The equity stockholders? expected rate of return will not?change after the new securities are issued.

1. Determine the?pre

 


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