Question
ABC Company wants to expand its facilities by financing a building worth $100,000,000 with an expected return of 12.05%. ABCs capital structure consists of $70,000,000
ABC Company wants to expand its facilities by financing a building worth $100,000,000 with an expected return of 12.05%. ABCs capital structure consists of $70,000,000 debt with a yield rate of 12% and $130,000,000 retained earnings at a cost of retained earnings at 14%. If the amount to be financed is greater than their capital structure, the company will issue new common stock with flotation costs at $100/share. Assuming that the dividends for the next year is $70/share, its constant growth rate is 7% and the tax rate is 30%, a) What is the value of the common stock now ($0), ignoring flotation costs?
b) What is the cost of issuing new common stock?
c) What is the WACC of the building to be financed?
d) Is the project acceptable or not? Explain.
e) Assuming that the building costs $250,000,000 with expected return of 12.53%, what is the WACC of the project?
f) Using (e), is the project acceptable or not? Explain.
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