Z. company plans to raise $100 million. the floation cost is expected ti be 8% i
ID: 2652111 • Letter: Z
Question
Z. company plans to raise $100 million. the floation cost is expected ti be 8% issuing debt, 6% for issuing preferred stock and 5% for issuing common stock. How much additional capital will they need ti raise in order ti procure a net amount of $100 million? How does the floation costs affect NPV decisions?
- the firms 10 year 7% annual coupon bond is currently trading at $717.49
- the firms 10% annual dividend perpetual preferred stock with a par value of $100 is trading at $71/43
the common stock is trading at $150. Their next dividend is expected to be $5.00. the growth rate is forcasted at 10%.
Explanation / Answer
Dear Student I just answered previous question which also contains these figures So I am taking weights from that question Previous question answered is as below Statement showing computationof WACC Particulars Weight Cost of Capital Weighted Cost of capital Equity or common stock 0.4000 18.465% 7.39% Preferred Stock 0.1500 14.00% 2.10% Debt 0.4500 9.76% 4.39% 1.0000 13.88% CAPM ke= Rf + Beta(MRP) ke = 8% + 1.3(12%) ke = 8% + 15.60% ke = 23.60% Dividend Growth ke = D1/Po + G ke= 5/150 + 10% ke= 13.33% Ke = (23.60% + 13.33%)/2 Ke = 18.465% Kp = Dividend / Price Kp = 10/71.43 kp = 14% Kd = intt/price Kd = 70/717.49 Kd = 9.76% Answer of current Question Statement showing computationof Financing Particulars Weight Allocation of 100 Million based on weight Floatation Cost Amount to be raised(Amount/1-floatation cost) Equity or common stock 0.4000 40,000,000.00 5.00% 42,105,263.16 Preferred Stock 0.1500 15,000,000.00 6.00% 15,957,446.81 Debt 0.4500 45,000,000.00 8.00% 48,913,043.48 1.0000 100,000,000.00 106,975,753.44 Company will take take these floatation cost into consideration for computing cost of equity,debt and Preferred stock. Therefor cost of these will increase which will ultimately increase weighted average cost of capital. This will ultimately means that the cash flows from the project will be discounted using higher rate.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.