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| 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 restaurant, and the company is now considering two financing alternatives. The first alternative would consist of
Bonds that would have a 9% effective annual rate and would net $19.2 million after flotation costs
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 an 11% effective annual rate and would net $48 million after flotation costs. 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 weighted marginal cost of capital for Rogers' second financing alternative consisting solely of bonds would be A. 5.13% B. 6.60% C. 5.40% D. 6.27% |