Defence Electronics Inc. December 31, 2021. (If information appears to be missing, change the row height to see it.) Based in Winnipeg, Manitoba, Defence Electronics Inc. (DEI) was founded to provide security systems, facilities controls and related services. DEI established a solid reputation for quality and the business grew thanks to strong relationships with large, long-term customers in Canada and the United States. The Research and Innovation Group (RIG) is the development side of the company. They are considering a new contract that will strain resources for not only RIG, but the entire company. With an upfront cost of $5.0 million, managers understand that the cost of capital will be a key part of maintaining and improving Clearview's competitive edge. You have been asked to calculate the company's weighted average cost of capital (WACC), based on the following information. Over the last five years the annual dividends on the firm's common stock have grown at 6.00 percent per year and this growth is expected to continue indefinitely. A common share dividend of $2.410 per share was recently paid. Common shares trade at $44.000 per share. The company has authorized 576,000 common shares, with 432,000 common shares issued and outstanding. The company has issued 109,000 of the 138,000 preferred shares authorized. The annual preferred share dividend is $1.050 per share. The latest preferred share price is $49.100 per share. DEI has an outstanding bond issue, payable semi-annually, that originally had a 25 year maturity. The initial bond offering was sold 8 years ago, at par and raised $22.50 million dollars. (To be specific 22,500 bonds were sold at $1,000 each.) The yield to maturity, when they were issued, was 6.40 percent. Currently, the nominal yield to maturity on bonds with a similar risk is at 6.98 percent. The company will use its current capital structure to set target weights for debt, preferred shares and common shares. Flotation costs are 4.00 percent for preferred shares, 6.00 percent for common shares and 5.00 percent for debt. The company's tax rate is 45.00 percent. After-tax earnings for the year will be $4.00 million and the company has a payout ratio of 45.00 percent. Use this information to answer the questions on the following requirements Requirements: A. Find market values of outstanding bonds, preferred shares and common shares: 1. Bonds: a. What is the market value of each bond? (Enter your answer to two decimal places. (e.g. $12.34)) b. What is the total market value of bonds at Dec 31, 2021 (Round your answer to whole numbers. For example, $1,234,000 not $1.234 million.) 2. Preferred shares: What is the total market value of preferred shares at Dec 31, 2021 (Round your answer to whole numbers. For example, $1,234,000 not $1.234 million.) 3. Common shares: What is the total market value of common shares at Dec 31, 2021 (Round your answer to whole numbers. For example, $1,234,000 not $1.234 million.) B. What weights are assigned to debt, preferred shares and common equity on Dec 31, 2021 (Round all your answers to two decimal places. If you want to enter the number 12.34%, for example, enter 12.34 (not 0.1234) and do not enter the percent sign.) C. Calculate the after-tax cost of the various components of WACC (Round all your answers to two decimal places. If you want to enter the number 12.34%, for example, enter 12.34 (not 0.1234) and do not enter the percent sign.) 1. Bonds a. What is the nominal yield-to-maturity? b. What is the effective yield-to-maturity? c. Calculate the after-tax cost of new debt (using the effective yield-to-maturity). 2. Preferred shares: 3. Common equity in the form of retained earnings: 4. Common equity in the form of new shares: D. What is the Weighted Average Cost of Capital if: 1. The company uses new debt, new preferred shares and just retained earnings? 2. The company uses new debt, new preferred shares and new common shares? E. How much of the new capital projects can be funded without using new shareholders? Unless directed otherwise; r Percentages should be rounded to two decimal places. If you want to enter the number 12.34%,for example, enter 12.34 (not 0.1234) and do not enter the percent sign. r Bond prices should be to two decimal places (e.g. $12.34) r Per share figures should be rounded to three decimal places (e.g. $1.234 per share) r Total dollar figures should be rounded to zero decimal places (e.g. $1,234) Read the above case carefully and gather the key facts in the space provided below. You will need these facts to solve each of the required questions so make sure you pay close attention to the details of the case Key Facts Key Facts Key Facts Bonds Preferred Shares Common Shares Original Maturity Period 25 Years Preferred Share Dividends (D) $1.050 Dividend Growth Rate (g) 6% Time since Issuance of the Bonds 8 Years ago Preferred Share Price (Pp) $49.100 Current Dividends (D0) $2.41 Time to Maturity 17 Years Authorized Preferred Shares 138,000 Common Share Price $44,000.000 Total Value Raised $22,500,000 Issued and Outstanding Preferred Shares 109,000 Authorized Common Shares 576,000 Face Value (FV) Preferred Shares Floatation Cost 4.00% Issued and Outstanding Common Shares 432,000 Rate at Time of Issue (Coupon Rate %) 6.40% Common Share Floatation Cost 6.00% Current Yield to Maturity (Current Rate %) 6.98% Other Key Facts Number of Payments Per Year 2 Corporate Tax Rate 45.00% Debt Floatation Cost (%) 5.00% After Tax Eraning for the Year $400,000 Payout Ratio 45.00% Project Cost $500,000 A. Find market values of outstanding bonds, preferred shares and common shares: a. What is the market value of each bond? (Enter your answer to two decimal places. (e.g. $12.34)) b. What is the total market value of bonds at Dec 31, 2021 (Round your answer to whole numbers. For example, $1,234,000 not $1.234 million.) Solutions Output for Questions 1a Solutions Output for Questions 1b Market Value of each bond Market Value of Bonds Present Value of Coupon Payments Present Value of Coupon Payments Present value of Principal at maturity Present value of Principal at maturity Current Value of the Bonds Total Market Value of the Bonds 2. Preferred shares: What is the total market value of preferred shares at Dec 31, 2021 (Round your answer to whole numbers. For example, $1,234,000 not $1.234 million.) 3. Common shares: What is the total market value of common shares at Dec 31, 2021 (Round your answer to whole numbers. For example, $1,234,000 not $1.234 million.) Solutions Output for Questions 2 Solutions Output for Questions 3 Total Market Value of Preferred Shares Total Market Value of Common Shares Total Market Value of Preferred Share Total Market Value of Common Shares B. What weights are assigned to debt, preferred shares and common equity on Dec 31, 2021 Solutions Output for Questions B Weights of Debts, Preferred Shares and Common Shares Components Market Value Weights (Wd, Wp, We) Debts Preferred Shares Common Shares Total Capital C. Calculate the after-tax cost of the various components of WACC (Round all your answers to two decimal places. If you want to enter the number 12.34%, for example, enter 12.34 (not 0.1234) and do not enter the percent sign.) Calculate the after-tax cost of the various components of WACC Calculate the after-tax cost of the various components of WACC 1. Bonds 2. Preferred shares with and without flotation: a. What is the nominal yield-to-maturity? 3. Common equity in the form of retained earnings: b. What is the effective yield-to-maturity? 4. Common equity in the form of new shares: c. Calculate the after-tax cost of new debt (using the effective yield-to-maturity). Solutions Output for Questions C:2, 3, 4 Solutions Output for Questions C: 1a, 1b, 1c 2a. Cost of Preferred Shares Without Flotation (Kp) 1a. Nominal Yield to Maturity (Nom) 2b. Cost of New Preferred Shares with Flotation (Kpn) 1b. Effective Yield to Maturity (EAR) 3. Cost of Common Equity (Retained Eranings) (Ke) 1c. After-tax Cost of New Debt using (Using EAR) 4. Cost of New Common Shares (Kn) D. What is the Weighted Average Cost of Capital if: D. What is the Weighted Average Cost of Capital if: 1. the company uses new debt, new preferred shares and just retained earnings? 2. The company uses new debt, new preferred shares and new common shares? Solutions Output for Questions D: Calculating WACC Solutions Output for Questions D: Calculating WACC Capital Components After-tax Costs (Kd) (Kp) (Ke) Weights (Wd, Wp, We) Capital Components After-tax Costs (Kd) (Kp) (Kn) Weights (Wd, Wp, We) New Debt New Debt New Preferred Shares New Preferred Shares Common Equity (Retained Earnings) New Common Shares Cost of Capital (WACC) Cost of Capital (WACC) E. How much of the new capital projects can be funded without using new shareholders? Solutions Output for Questions E After Tax earnings for Year Dividends Payout New Retained Earnings Amount of project that can be financed without New Sharesholders