Valley flights, inc. Has a capital structure made up of 40% debt and 60% equity

Question

Valley flights, inc. Has a capital structure made up of 40% debt and 60% equity and a tax rate of 30%. A new issue of $1000 par bonds maturing in 20 years can be issued with a coupon of 9% at a price of $1,098.18 with no flotation costs. The firm has no internal equity available at this time, but can issue new common stock at a price of $45. The next expected dividend for the firm is expected to grow at a constant annual rate of 5% per year indefinitely. Flotation costs on the new equity will be $7.00 per share. The company has the following independent investment projects available:

Explanation / Answer

From the given information, we can find the cost of debt and cost of equity anlong with the WACC.

The company's independent investment projects are not given.

Pretax Cost of debt = rate(nper,pmt,pv,fv) =rate(40,45,-1098.18,1000) = 4% (semi annual)

Annual pretax cost of debt = 8%

After tax cost of debt = 8*(1-0.3)= 5.6%

Cost of equity after floation costs = Ke = D1/(P0-floataion) + g

D1 = next expected dividend = 2.70

So cst of equity = 2.70/(45-7) + 0.05 = 0.1211 = 12.11%

Hence WACC = 0.4*5.6 + 0.6*12.11 = 9.51%

Note: We can only calculate this with given information. Kindly provide the projects and full question.

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