ANC Company is considering a few expansion projects that have been proposed by t
ID: 2813387 • Letter: A
Question
ANC Company is considering a few expansion projects that have been proposed by the Finance Manager. You are given the task to develop an estimate of the firm's cost of capital.
Given :
- Current outstanding bonds are trading at $1230 with 8% annual payment and 20 years to maturity. The firm estimates the issuance cost for new bonds would be $8 per bond.
- ANC's shares are currently trading at $68 per share. Its last dividend was $6 and dividends are expected to grow at a constant rate of 3% in the foreseeable future. Floatation cost is estimated at $2 per share.
- The current price of the firm's 12%, $100 par value, perpetual preferred share is $108
- The firm's target capital structure is 60% long term debt, 10% preferred share and 30% common share.
- The firm is in the 35% tax bracket.
Explanation / Answer
cost of debt
Using rate function in MS excel
rate(nper,pmt,pv,fv,type) nper = 20 pmt = 80 fv = 1280-8 = 1272 fv =1000 type = 0
5.69%
after tax cost of debt
before tax cost of debt*(1-tax rate)
5.69*(1-.35)
3.6985
cost of common stock = preferred dividend/net proceeds
6*(1.03)/(68-2) + growth
12.36%
cost of preferred stock
preferred dividend/net proceeds
12/108
11.11%
WACC
source
weight
cost
weight*cost
debt
0.6
3.6985
2.2191
preferred stocl
0.1
11.11
1.111
common stock
0.3
12.36
3.708
WACC in %
sum of weight*cost
7.04
cost of debt
Using rate function in MS excel
rate(nper,pmt,pv,fv,type) nper = 20 pmt = 80 fv = 1280-8 = 1272 fv =1000 type = 0
5.69%
after tax cost of debt
before tax cost of debt*(1-tax rate)
5.69*(1-.35)
3.6985
cost of common stock = preferred dividend/net proceeds
6*(1.03)/(68-2) + growth
12.36%
cost of preferred stock
preferred dividend/net proceeds
12/108
11.11%
WACC
source
weight
cost
weight*cost
debt
0.6
3.6985
2.2191
preferred stocl
0.1
11.11
1.111
common stock
0.3
12.36
3.708
WACC in %
sum of weight*cost
7.04
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