Assignment 2

1. You are given the following capital structure for NYT corporation:
Capital Structure
Debt
Preferred
Common

.20
.03
.77

Assume that NYT will maintain the current structure and their stock has a constant
growth rate( .04). Further, assume NI= $325,000 , Payout ratio = 60 % , P o =
$37.50 , Do = $2.25, Ppfd = $100.50 , Dpfd = $7.75 and the tax rate is 34 %.
The flotation costs of the various capital instruments are as follows:
Common equity: F = 5% if new equity <= $150,000
10% if new equity > $150,000
Preferred stock: F = 8% if pfd <= $10,000
F = 11% if pfd > $10,000
The costs of Debt are; the firm has a 20 year maturity bond with 16 years
remaining that has a 0.03 annual coupon rate and is currently selling at 101. If the
firm issues more than $55,000 of new debt their rating will be affect so that new debt
will have a .015 premium.
In addition,
Investment Opportunity Schedule
Project
Cost
IRR
A
100,000
.11
B
110,000
.10
C
140,000
.09
D
60,000
.08
a) Find NYT's breakpoints
b) Determine the component costs of capital and find ra
c) Graph the MCC schedule and the IOS
d) Determine which projects will be accepted
e) What assumption did you make about risk in your analysis?