What would the capital structure and wacc look like

Reference no: EM132042837

Question: You are given the following information about a company. Their tax rate is 34%. The firm is in need of $5 million dollars in external funds. Your bond advisor suggests that new bond issues can be lower than the current yield to maturity by 2.0% . You are not sure he is correct. Should you issue the new debt to raise money?

use RATE, specifically, '=rate(nper, pnt, pv, fv). FV is the par of 1000. PV is the current price. PMT is the coupon rate x 1000/2, and nper is the maturity x 2. You should get a cost of debt of 5.24% before tax.

Existing capital structure: Debt: 5,000 Eight percent (8%) coupon bonds outstanding. The par value is $1000 and they mature in ten years. They are currently selling for $1250 and make semiannual payments. Equity: 50,000 shares outstanding. The common stock is currently selling for $72 per share. The beta for the company is 1.15. Preferred Stock: 10,000 shares of 2% preferred stock with a par value of $100, and is currently selling for $65 per share. Market Information: The risk of the market is 6% and the risk-free rate is 2%. The industry debt-equity ratio is 33%. The flotation rate for new debt is 3% and for new equity it is 5%.

1 New cost of capital if add 5M in new bonds This assumes we sell enough bonds to realize 5M. Since the price will be net of flotation we need to sell them at 1000 but net a bit less.

2 What if they finance the 5M with all equity? What would the capital structure and WACC look like?

3 What if they add 5M in financing split among debt and equity in proportions equal to the current capital structure. What is the WACC?

Reference no: EM132042837

Questions Cloud

What financial engineering strategy : Given this scenario, what financial engineering strategy would be most beneficial to Coolmist?

What is your forecasted retained earnings : In forecasting next year's retained earnings you had a last year balance of $5,801. What is your forecasted Retained Earnings

Air services is now in final year of project : Karsted Air Services is now in the final year of a project. The equipment originally cost $20 million, of which 75% has been depreciated.

Who are suffering the worst stereotypes : What is your point of view on recent immigrant, who are suffering the worst stereotypes. (With what is going on around the world)?

What would the capital structure and wacc look like : New cost of capital if add 5M in new bonds This assumes we sell enough bonds to realize 5M. Since the price will be net of flotation we need to sell them.

Compute the compensating tax payable : A tax refund of Kshs 360,000 was received by the company for the year ended 31 dec 2008. Compute the Compensating tax payable

How can you immunize the obligation : How can you immunize the obligation? (Here, you need to construct an immunized portfolio that consists of the zero-coupon bonds and the perpetuities.)

Leaving his job to get mba be smart financial decision : If his real opportunity cost is 10 percent, would leaving his job to get an MBA be a smart financial decision?

Dominants traits attributed to italians in the cartoons : What are the dominants traits attributed to Italians in the cartoons(the mascot new orleans 1886, shadow of the black-hand and original wop)?

User Account

All Pages