Daisy Corporation is constructing its cost of capital. Its target capital structure is 30 percent debt and 70 percent common equity. It can raise up to $40.0 million in bank loans at a before tax cost of 10% but any debt beyond $40.0 million will have a higher cost at 12% before tax. Daisy is a constant growth firm that just paid a common stock dividend of $3.50, the common stock currently sells for $33.00 per share and has a constant growth rate of 5 percent. The firm's available retained earnings are expected to be $55 million. Flotation costs on new common stock total $4.00 per share. The new shares of common stock will have to be underpriced by $2.50 per share to sell. The firm's marginal tax rate is 40 percent. a. Calculate the after tax cost for each of the capital components. b. Calculate all Breakpoints. c. Draw the graph, label all elements (i.e., label each tier, the breakpoints, etc) c. Calculate the weighted cost of capital for each tier of financing
Daisy Corporation is constructing its cost of capital. Its target capital structure is 30 percent debt and 70 percent common equity. It can raise up to $40.0 million in bank loans at a before tax cost of 10% but any debt beyond $40.0 million will have a higher cost at 12% before tax. Daisy is a constant growth firm that just paid a common stock dividend of $3.50, the common stock currently sells for $33.00 per share and has a constant growth rate of 5 percent. The firm's available retained earnings are expected to be $55 million. Flotation costs on new common stock total $4.00 per share. The new shares of common stock will have to be underpriced by $2.50 per share to sell. The firm's marginal tax rate is 40 percent. a. Calculate the after tax cost for each of the capital components. b. Calculate all Breakpoints. c. Draw the graph, label all elements (i.e., label each tier, the breakpoints, etc) c. Calculate the weighted cost of capital for each tier of financing
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Bremond Equipment Supply Corporation (BESC) needs to determine its Weighted Average Cost of Capital in order to make a few capital budgeting decisions. The firm has already established the proporation of its capital. Use these proportions in calculating the firm's WAAC.
|
| Target Market |
| Source of Capital | Proportions |
| Long-term debt | 69% |
| Preferred stock | 5% |
| Common stock equity | 26% |
Debt: BESC can sell a 15-year, semi-annual,$1,000 par value, 8.75 percent bond for $985. A flotation cost of 1.75 percent of the face value would be required in addition to the discount of $15.
Preferred Stock: BESC has determined it can issue preferred stock at $70 per share par value. The stock will pay an $8.00 annual dividend. The cost of issuing and selling the stock is $2 per share.
Common Stock: BESC's common stock is currently selling for $42 per share. The dividend expected to be paid at the end of the coming year is $5.35 Its dividend payments have been growing at a constant rate for the last five years. Five years ago, the dividend was $3.00. It is expected that to sell, a new common stock issue must be underpriced at $4 per share and the firm must pay $1 per share in flotation costs.
Additionally, the firm's marginal tax rate is 40 percent.
To help determine the firmâs WACC, we will break this problem down into steps:
Calculate the rate for the new bond issue, notice is has semi-annual compounding.
Calculate the after-tax cost of the bond issue.
Calculate the cost of the new issue of preferred stock.
Calculate the growth rate of the common stock dividends.
Calculate the cost of the new common stock issue.
Finally, calculate the firm's weighted average cost of capital assuming the firm has exhausted all retained earnings.
