Your company currently has a capital structure made up of the following: source.

Question

Your company currently has a capital structure made up of the following:

source... number... price per asset

common stock ...240,000... $12.01

coupon bond a... 245... $1092.33

coupon bond b... 122... $834.12

preferred stock... 100,000 ...$22.97

private debt... 1... $450,000

The firm has a beta of 1.78 and the risk-free rate is 1.2% and the expected return on the market is 11.2%. Bond A has a of YTM of 11.5%, while Bond B has a YTM of 8.14%. The preferred stock has a dividend yield of 3% and a face value of $50. The private debt has a cost of 9.5%. The firm has a tax rate of 35%.

Now, you have been put in charge of a restructuring and after exhaustive analysis, you have decided that the best course of action is to replace both the private debt and Coupon Bond B with Common Stock.   You may round to the nearest share of common stock added. You may assume all information remains the same for the assets.

If you carry through with the restructuring, what is the new Weighted Average Cost of Capital for your firm? (20 pts)

New Weighted Average Cost of Capital (WACC)            _____________________

Explanation / Answer

Ans

Revised Capital Structure Type of Financing Number Price Value Weigts based on market Value Specific After tax Cost of Capital Weighetd Cost Common Stock 2,40,000.00 12.01 28,82,400.00 New Common Shares in place of Bond A & B      45,942.00 12.01     5,51,763.00 Total Common Stock 2,85,942.00 34,34,163.00 57% 19% 10.9% Coupon Bond A 245 1092.33     2,67,621.00 4% 7% 0.3% Preffered Stock 100000 22.97 22,97,000.00 38% 0.03 1.1% Ans 12.4%

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