Calculate company after-tax weighted average cost of capital

Assignment Help Financial Management

Reference no: EM131081575

During the past three years, Tysseland Communications Limited (TCL) has been constrained by the high cost of capital to fund for many of its investments. Recently, capital costs have been declining steadily causing the company to consider a major project. You are appointed as an assistant to the finance manager and your task is to calculate the cost of capital for the new project. TCL has the following capital structure, which it considers to be optimal: debt (25%), preference shares (15%), and ordinary shares (60%). TCL's tax rate is 30%, and investors expect earnings and dividends to grow at a constant rate of 7% per year into the future. TCL paid a dividend of $3.65 per share last year, and its share currently sells at a price of $65 per share. Long term Government bonds yield 6% per year and the market risk premium is 5% per year. An analyst has confirmed that TCL's beta is 1.40. The company has the following terms that apply to new security offerings: • Preference shares: New preference shares could be sold to the public at a price of $80 per share, with a dividend of $6. Flotation costs of $5 per share would be incurred. • Debt: Debt could be sold at an interest rate of 8% per year. • Ordinary shares: New common equity will be raised only by retaining earnings. Required:

a. Find the individual costs of the following sources of finance: • Debt, • Preference share, and • Ordinary share

b. Calculate the company’s after-tax weighted average cost of capital.

c. The finance manager confirmed that the project would generate an IRR of 15% per year. Based on your calculation inb.), should this project be undertaken by the company? Discuss your recommendation and support with relevant calculations.

Reference no: EM131081575

Questions Cloud

All three options are trading at the money : Two stocks (Stock J and Stock K) have the same current stock price, and the same standard deviation. There exists a call option on 100 shares of Stock J, a call option on 100 shares of Stock K, and a call option on a portfolio of 50 shares of J and 5..

Difference in perceptions of business professionals : Perhaps one culture may perceive that by going to a store in the United States and it is unreasonable to not barter for lower prices. When it comes to individual ethics, McCoy (1997) asks, "we cannot quit our jobs over every ethical dilemma, but i..

Correctly applies to unlevered firm that pays no taxes : Which one of these statements correctly applies to an unlevered firm that pays no taxes? The return on assets equals the return on equity and also equals WACC. The return on equity equals WACC and exceeds the return on assets. The return on equity ex..

Measuring the impact of organizational change : Research a recent journal article (published within the last two years) that discusses a health care organization that has recently experienced a significant change,

Calculate company after-tax weighted average cost of capital : During the past three years, Tysseland Communications Limited (TCL) has been constrained by the high cost of capital to fund for many of its investments. Recently, capital costs have been declining steadily causing the company to consider a major pro..

Do you think these costs should be included in gdp : Do you think these costs should be included in GDP?

Generate perpetual after-tax cash flows : A firm is considering a project that will generate perpetual after-tax cash flows of $19,000 per year beginning next year. The project has the same risk as the firm’s overall operations and must be financed externally. Equity flotation costs 16 perce..

Operating leverage at financial break-even level of output : A project has the following data: Price/Unit=$45. Variable Cost/Unit=$36. Fixed costs=$20,000. Required return-8%. Initial investment=$100,000. Life=4 yrs. Ignoring tax effects, what are the following: acct break-even; cash break even; financial brea..

Draw the sequence of functions : Math 104: Homework 8. Draw the sequence of functions f0(x), f1(x) and f2(x). Which of the functions are continuous at x = 0? Which of them are differentiable at x = 0

User Account

All Pages