What is the flotation cost and marginal cost of capital

Assignment Help Financial Management

Reference no: EM131921053

Given the following information for a publically traded firm:

10 Year Treasury Bond Yield = 2.30%

Common Share Beta = 1.5

Expected Market Risk Premium between 4.00% and 6.00%

Common Share Price = $13.00

Common Share Dividend = $0.30

Common Shares Outstanding = 100 million

Preferred Share Dividend = $2.00

Preferred Shares Outstanding = 3 million

Preferred Share Dividend Yield = 6%

Debt Maturity = 20 Years

Coupon Rate on Debt = 4.00% (assume annual coupon payments)

Spread to Treasury Yield = 1.30%

Book Value of Debt = $700 million

Tax Rate = 20%

(a) Calculate the firm’s weighted average cost of capital (WACC).

(b) What is the flotation cost and Marginal Cost of Capital (MCC) for equity if the firm needs to raise $500 million of new equity? You may assume that the shares are issued at $13.00 a share, that the pre-tax underwriting fees are 3.30%, that the firm pays fixed pre-tax offering fee of $3.5 million, and that you may use your results from part a) in your answer.

(c) What is the firm’s new WACC, if the firm uses $350 million of the equity issue in part (b) to retire outstanding debt. You may assume that with a lower debt level, the firm’s beta is now 20% lower, that the firm’s share price hasn’t changed, and that you may use your results from parts a) and b) in your answer.

Reference no: EM131921053

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