1. New Equity Issuance FCost of External Equity   Ex. Suppose Archer’s Aquarium Equipment may continue to issue unlimited amounts of common equity at a floatation cost of 8%. The firm recently paid a common stock dividend of $3 per share, and the firm’s dividends are expected to grow by 3% per annum. If the firm’s current stock price is $40 per share, what is the cost of external equity for Archer’s Aquarium Equipment?

2. Weighted Average Cost of Capital  Given an optimal capital structure of 60% common equity, 30% debt, and 10% preferred stock, what is Archer’s Aquarium Equipment’s weighted average cost of capital (WACC) for capital budgets in excess of $50 million?

3. Optimal Capital Budget FInvestment Opportunity Schedule (IOS) - FEx. Archer’s Aquarium Equipment can select among the following projects:

4. Optimal Capital Budget  Which projects should Archer’s Aquarium Equipment undertake? % New Capital Raised

5. Comprehensive Example FEx. Ling’s Libation Barn has 4 potential capital investment projects with the following costs and rates of return: FLLB estimates it can issue debt with a before-tax cost of 10 percent, and its marginal federal-plus-state tax rate is 30 percent. Ling’s Libation Barn may also issue preferred stock at $50 per share, which pays a constant dividend of $5 per year. The floatation cost on preferred stock issuance is $1 per share. FIn addition, net income is expected to be $250,000, and the firm plans to maintain its current dividend payout ratio of 40%. The firm’s stock is currently selling for $40 per share. The year-end dividend (D 1 ) is expected to be $3.50, and the dividend growth rate is expected to be constant at 6% per year into the foreseeable future. Floatation costs of issuing new common stock equal $4 per share (F=10%), and LLB’s optimal capital structure consists of 75% common equity, 15% debt, and 10% preferred stock.

6. Retained Earnings Break Point  What is LLB’s retained earnings break point?

7. Capital Component Costs  What is LLB’s component cost of debt?  What is LLB’s component cost of preferred stock?  What is LLB’s component cost of retained earnings?  What is LLB’s component cost of new common equity?

8. Weighted Average Cost of Capital  What is LLB’s weighted average cost of capital for capital budgets <$200,000?  What is LLB’s weighted average cost of capital for capital budgets > $200,000?

9. Optimal Capital Budget  What should be the size of LLB’s optimal capital budget?