The Buccaneer Company was recently formed to manufacture a new product. It has t

Question

The Buccaneer Company was recently formed to manufacture a new product. It has tl capital structure: 9% Debentures of2002 ($1000 Par) 7% Preferred stock ($100 Par) Common stock (320,000 shs.) $6,000,000 2,000,000 12,000,000 $20,000,000 Total e company's published beta coefficient is 1.5. The return on the market portfoli k fee rate is .03. Assume a marginal tax rate of40%. A. Compute the weighted-average cost of capital. The Financial Analysts at the Buccaneer Company think they can low by issuing $4,000,000 in new 8%, 20 year, $1000 par, mortgage bond buying back $4,000,000 in common stock, thus making their new deb The new bonds would incur 10% in various flotation costs. Compu average cost of capital.

Explanation / Answer

Cost of Equity = Rf + Beta x (Rm - Rf) Cost of Equity = .03 + 1.5 x (.09 - .03) 12.00% Cost of Debt after Tax = 9% x (1-40%) 5.40% Sources of Capital Market Value Weights Cost of Capital WACC Debentures $6,000,000.00 30.00% 5.40% 1.62% Preferred Stock $2,000,000.00 10.00% 7.00% 0.70% Common Stock $12,000,000.00 60.00% 12.00% 7.20% Total $20,000,000.00 100.00% 9.52%

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