Defence Electronics Inc. (25 marks) Suppose you have been hired as a financial consultant to Defence Electronics Inc. (DE)a large publicly traded firm that is the market share leader in radon detection systems (RDSS). The company is looking at setting up a manufacturing plant overseas to produce a new line of RDSs. The project will require an investment of $11.0 million dollars and the president of the company wants to be sure she understands her cost of capital before going ahead with the decision Market information for the latest year-end (Dec 31- 19) is as follows: 23:20 Debt Common Stock The company has issued 18,000 bonds, each with a par value of $1,000 and a coupon rate of 8.40 percent (payable semi- annually. The bonds were issued 4 years ago with a 30 year maturity. They are currently selling for $91700 each 585,000 common shares have been authorized (with 521000 shares issued and outstanding) Common shares are selling for $64 000 per share, 165.000 preferred Shares have been authorized (with 157000 issued and outstanding. The closing price of preferred shares was $26.400 per share. Preferred Stock DEI uses G. M. Wharton as its lead underwriter Wharton charges DEI 5.00 percent Commission on new common stock issues, 6.00 percent on new preferred stock issues, and 3.00 percent on new debt issues. Wharton has included all direct and indirect flotation costs in these rates The preferred shares were issued six years ago and pay an annual dividend of $1.040 per share. Last year. El declared and paid a 2 common share dividend of $1310 per share This represented a 400 percent growth in the common share dividend a rate that is expected to continue Into the future) and a dividend payout ratio of 35.00 percent (also expected to continue into the future). Der tax rate is 3000 percent. Preliminary year-end results show net earnings after interest, taxes and preferred share dividends) for the year ending Dec 31-19 is $30 million Requirements A Use market values to calculate the weight of outstanding bonds preferred and common shareswm you ** 100.000 Dondolo 1 What is the total market value of outstanding bonds on Dec 31-1925 2. What is the total market value of all issued preferred shares on Dec 31-1975 3. What is the total market value of all issued common shares on Dec 31-19? 51 4. What weights are asigned to debit preferred shares and common equity on Dec 31-197 (Note: I'm only looking for the weights here, not WACC)? 02:32:45 Weight Description Debt Preferred Common Total B. Calculate the after tax cost of debt 1 if the par value of each bond is $1000, what the yield-to-maturity on the bond? 96 2. The yield you calculated in part 1 is the nominal yield. Since the bonds compound semi-annually, what is the effective yield 3. Calculate the after-tax cost of debt using the effective yield. (Note: If you don't know how to calculate the effective yield, use the nominal yield you calculated in part 1 Show me you know how to calculate after-tax cost of debt even if you're starting with the wrong number) C.Calculate the after-tax cost of preferred shares D. Calculate the after-tax cost common equity in the form of retained earnings (Ke) % E Calculate the after-tax cost of common equity in the form of new shares (Kn): 0% F. The company needs to finance $110 million in new capital projects. How much of that can be funded without issuing new common stock? tar your own hombo 000.000 rit 10 mitor Dentamos G What is the weighted average cost of capital if Active Wind D. Calculate the after-tax cost common equity in the form of retained earnings (ke) % E. Calculate the after-tax cost of common equity in the form of new shares (Kn) The company needs to finance $10 million in new capital projects. How much of that can be funded without issuing new common stock? you when 1000000 G. What is the weighted average cost of capital 1. the company uses new debl. new preferred shares and just retained earnings? 2. the company uses new debt, new preferred shares and new common shares? Activato Windows