A company, West Berwick Enterprises, has a capital structure as follows: What wo
ID: 2654686 • Letter: A
Question
A company, West Berwick Enterprises, has a capital structure as follows:
What would be the minimum expected return from a new capital investment project to satisfy the suppliers of the capital? Assume the applicable tax rate is 40%, interest on debt is 7%, flotation cost per share of preferred stock is $0.75, and flotation cost per share of common stock is $4. The preferred and common stocks are selling in the market for $26 and $143 a share respectively, and they are expected to pay a dividend of $1.50 and $4.50, respectively, in one year. The company's dividends are expected to grow at 7% per year. The firm would like to maintain the existing capital structure to finance the new project.
I have to be able to show this in Excel.
Total Capital $1,000,000 Debt $400,000 Preferred Stock $100,000 Common Stock $500,000Explanation / Answer
After tax cost of debt = Cost of debt ( - tax)
= 7 ( 1- .40)
= 7 *.60
= 4.20%
Cost of preferred stock = Dividend /(Current price -Floatation cost)
= 1.50 /(26 -.75)
= 1.50 /25.25
= .0594 or 5.94%
cost of equity =( Dividend /[current price -floatation cost]) +growth
= (4.50 / [143 - 4 ]) / +.07
= ( 4.50 / 139 ) +.07
= .0324 + .07
= .1024 or 10.24%
capital structure weights (A) cost (B) weighted cost(A*B) Debt 400,000 .40 [400,000/1,000,000] 4.20 1.68 preferred stock 100,000 .10 [100000/1000000] 5.94 .594 common stock 500,000 .50 [500,000/1,000,000] 10.24 5.12 1,000,000 WACC 7.394%Related Questions
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