Gorge D manufactures drones (GorgeD) and requires $165 million to fund a new manufacturing facility. Gorgen will finance the project in a pattern similar to it's current financing. The firm's common stock is selling in the market at $320 per share; the market is believed to be in equilibrium. Common stock dividends of $2.25 per share were recently paid (Do). Dividend growth of 2 percent per year is expected for the foreseeable future. The market is currently requiring a 6 percent premium and Tbonds are currently yielding 3%. Preferred stock is selling in the market at $98 per share. The preferred has a dividend rate of 6.75% percent on $115 face value per share. GorgeD's current bonds are ten year, $1000 par bonds with a coupon rate of 9% and are selling at a price of $1150 per bond. Interest is paid semi- annually on the bonds. The firm faces a 28 percent marginal tax rate and the project asset beta is estimated at 0.88. GorgeD's balance sheet, in part, is presented below. GorgeD Partial Balance Sheet ($ x millions) Accounts Payable $157,000,000 Pfd Stock Accruals 84,000,000 Common stock @ par ($10 par) LT Debt ($1000 par) 165,000,000 Paid-In-Capital Total Debt $406,000,000 Retained Earnings Total Liab. & Eq. $15,000,000 8,550,000 85,000,000 118,000,000 $632,550,000 What is the cost of debt to the firm (Rd)? Rd = Estimate the cost of preferred stock to the firm (Rp) Rp = Estimate the cost of equity to the firm (Re) Re = Determine the weights of debt, preferred stock and common equity to be used in financing the project. Wd = Wp = We = Determine the cost of capital to the firm: WACC = In answering this part, make sure to create a table with all of the components. Include the components of each Req'd return as shown in class examples and partially in the table associated with text Example 13.5 Gorge D manufactures drones (GorgeD) and requires $165 million to fund a new manufacturing facility. Gorgen will finance the project in a pattern similar to it's current financing. The firm's common stock is selling in the market at $320 per share; the market is believed to be in equilibrium. Common stock dividends of $2.25 per share were recently paid (Do). Dividend growth of 2 percent per year is expected for the foreseeable future. The market is currently requiring a 6 percent premium and Tbonds are currently yielding 3%. Preferred stock is selling in the market at $98 per share. The preferred has a dividend rate of 6.75% percent on $115 face value per share. GorgeD's current bonds are ten year, $1000 par bonds with a coupon rate of 9% and are selling at a price of $1150 per bond. Interest is paid semi- annually on the bonds. The firm faces a 28 percent marginal tax rate and the project asset beta is estimated at 0.88. GorgeD's balance sheet, in part, is presented below. GorgeD Partial Balance Sheet ($ x millions) Accounts Payable $157,000,000 Pfd Stock Accruals 84,000,000 Common stock @ par ($10 par) LT Debt ($1000 par) 165,000,000 Paid-In-Capital Total Debt $406,000,000 Retained Earnings Total Liab. & Eq. $15,000,000 8,550,000 85,000,000 118,000,000 $632,550,000 What is the cost of debt to the firm (Rd)? Rd = Estimate the cost of preferred stock to the firm (Rp) Rp = Estimate the cost of equity to the firm (Re) Re = Determine the weights of debt, preferred stock and common equity to be used in financing the project. Wd = Wp = We = Determine the cost of capital to the firm: WACC = In answering this part, make sure to create a table with all of the components. Include the components of each Req'd return as shown in class examples and partially in the table associated with text Example 13.5
