Rogers, Inc., operates a chain of restaurants located in the Southeast. The company has steadily grown to its present size of 48 restaurants. The board of directors
recently approved a large-scale remodeling of the restaurants, and the company is now considering two financing alternatives.
? The first alternative would consist of
? Bonds that would have a 9% coupon rate and reissued at their base amount would net $19.2 million after a 4% flotation cost
? Preferred stock with a stated rate of 6% that would yield $4.8 million after a 4% flotation cost
? Common stock that would yield $24 million after a 5% flotation cost
? The second alternative would consist of a public offering of bonds that would have a 9% coupon rate and an 11% market rate and would net $48 million after a 4% flotation cost.
Rogers’ current capital structure, which is considered optimal, consists of 40% long-term debt, 10% preferred stock, and 50% common stock. The current market value of the common stock is $30 per share, and the common stock dividend during the past 12 months was $3 per share. Investors are expecting the growth rate of dividends to equal the historical rate of 6%. Rogers is subject to an effective income tax rate of 40%.
The after-tax cost of the common stock proposed in Rogers’ first financing alternative would be