Eco Plastics Company Since its inception, Enviro Plastics Company has been revolutionizing plastic and trying to do
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Eco Plastics Company
Since its inception, Enviro Plastics Company has been revolutionizing plastic and trying to do its part to save the environment. Enviros founder, Marion Cosby, developed a biodegradable plastic that her company is marketing to manufacturing companies throughout the southeastern United States. After operating as a private company for six years, Enviro went public in and is listed on the Nasdaq stock exchange.
As the chief financial officer of a young company with lots of investment opportunities, Enviros CFO closely monitors the firms cost of capital. The CFO keeps tabs on each of the individual costs of Enviros three main financing sources: longterm debt, preferred stock, and common stock. The target capital structure for Enviro is given by the weights in the following table:
Source of capital Weight
Longterm debt
Preferred stock
Common stock equity
Total
At the present time, Enviro can raise debt by selling year bonds with a $ par value and a annual coupon interest rate. Enviros corporate tax rate is and its bonds generally require an average discount of $ per bond and flotation costs of $ per bond when being sold. Enviros outstanding preferred stock pays a dividend and has a $pershare par value. The cost of issuing and selling additional preferred stock is expected to be $ per share. Because Enviro is a young firm that requires lots of cash to grow, it does not currently pay a dividend to common stockholders. To track the cost of common stock, the CFO uses the capital asset pricing model CAPM The CFO and the firms investment advisors believe that the appropriate riskfree rate is and that the markets expected return equals Using data from through Enviros CFO estimates the firms beta to be
Although Enviros current target capital structure includes preferred stock, the company is considering using debt financing to retire the outstanding preferred stock, thus shifting their target capital structure to longterm debt and common stock. If Enviro shifts its capital mix from preferred stock to debt, its financial advisors expect its beta to increase to
To Do
a Calculate Enviros current aftertax cost of longterm debt.
b Calculate Enviros current cost of preferred stock.
c Calculate Enviros current cost of common stock.
d Calculate Enviros current weighted average cost capital WACC
e Assuming that the cost of debt financing does not change, what effect would a shift to a more highly leveraged capital structure consisting of longterm debt, preferred stock, and common stock have on the risk premium for Enviros common stock?
f What would be Enviros new cost of common equity?
g What would be Enviros new weighted average cost of capital WACC
h Which capital structurethe original one or this oneseems better? Why?
Please show your work. Thank you!
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