Reference no: EM132953649
Question - Vaxipro Inc is considering raising funds to modernize its existing operations. However, they want to maintain their existing capital structure in raising these funds. They have provided us with their most recent financial statements:
Extracts - Balance Sheet, in thousands of dollars
Common stock $185,000 Long Term Debt $120,000 Preferred Shares $ 95,000
Additional information:
The company currently has 7.5% coupon, semi-annual payment bonds which were issued at 104.3 percent of par, with 22 years to maturity. A new issue of bonds would attract flotation costs of 6%.
The company's common shares that have a book value of $24 per share are currently selling at $19 per share.
The company's systematic risk is 1.5 and the current Treasury bill rate is 4.0%. The market rate of return on companies with similar risk characteristics as Vaxipro Inc. is 7%.
The company's preferred shares are 6.5%, $100 par preferred shares selling at $83 per share. Preference dividends are paid semi-annually.
The company's tax rate is 35%.
Required -
a) Calculate Vaxipro's after-tax cost of debt.
b) Calculate Vaxipro's cost of equity.
c) Calculate Vaxipro's cost of preferred shares.
d) Calculate Vaxipro's Weighted Average Cost of Capital
e) Based on its capital structure, would you categorize this firm as being highly financially leveraged? What are the pros and cons of financial leverage?
f) Explain why using a firm's WACC is not always appropriate for the evaluation of a new project.
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