Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

BLACKFRIDAY company is planning an expansion of its existing production capacity. The firm hired you as a consultant for the expansion project. Since you are

BLACKFRIDAY company is planning an expansion of its existing production capacity. The firm hired you as a consultant for the expansion project. Since you are a savvy project manager, you first decided to estimate the firms cost of capital based on the available data.

Data:

  • Tax Rate: 40%
  • Bond: Coupon rate 12%, Maturity Years 15, Present value $1150
  • Preferred Stock: Dividend rate 10%, Par Value $100, Present Value $111 Common Stock: Market price $50, D0=$4.20, Dividend growth 5%, Beta 1.2, Treasury Bond yield 7%, Market risk premium 6%. When the firm uses Bond-yield+Premium method, the risk premium is 4%.
  • Capital structure of ABC is as follows;
    • Debt 30%, Common Equity 60%, Preferred Stock 10%

Next, you asked your assistant Mr.COUPON to give his opinion on the following burning questions;

ii. Cost of bond of the company is as follows: a) Pre tax cost of bond - 12% b) Post tax cost of bond - 12% - 40% = 7.20%
iii. Cost of the firm's common stock: a) Based on historical data - 10% b) based on current market price - 100*10%/111 = 9.009% (This shall be used to evaluate future projects)

1) What are the components of the WACC you calculated above to be blamed for higher WACC? What can be done to reduce the WACC further?

2) Should you use this WACC for all the projects? Why and why not?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Investments

Authors: Zvi Bodie, Alex Kane, Alan Marcus, Lorne Switzer, Maureen Stapleton, Dana Boyko, Christine Panasian

9th Canadian Edition

1259271935, 9781259271939

More Books

Students also viewed these Finance questions

Question

2. Answer the question, Who should do the appraising?pg 87

Answered: 1 week ago

Question

1. Explain the purpose of performance appraisal.pg 87

Answered: 1 week ago