5. The Riley Company has Rs 200 million in total net assets at the end of 2019. It plans to increase its production machinery in 2020 by Rs 50 million. Bond financing, at an 11 percent rate, will sell at par. Preferred stock will have an 11.5 percent dividend payment and will be sold at a par value of Rs 100. Common stock currently sells for Rs 50 per share and can be sold to net Rs 45 after flotation costs. There is Rs 10 million of internal funding available from retained earnings. Over the past few years, dividend yield has been 6 percent and the firm's growth rate is 8 percent. The tax rate is 40 percent. The present capital structure shown below is considered optimal:
Total liabilities to assets ratio
Debt:
4% coupon bonds 7% coupon bonds
Preferred stocks
Rs 40,000,000
Rs 80,000,000
Rs 20,000,000
Common stock (Rs 10 par)
Rs 40,000,000
Retained earnings
Rs 60,000,000
Total
Rs 100,000,000
Rs 200,000,000
Equity
a. How much of the Rs 50 million must be financed by equity capital if the present capital structure is to be maintained?
b. How much of the equity funding must come from the sale of new common stock?
C. Calculate the component cost of:
i. New debt
Retained earnings
ii. New preferred stock
iv. New equity
d. What is Riley's average cost of equity for 2020?
c. What would be Riley's weighted average cost of capital if only retained earnings were used to finance additional growth that is, if only Rs 20 million were raised?
f. What is the weighted average cost of capital when Rs 50 million is raised?
