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I don't understand this. Please thoroughly explain. Im trying to complete with paper and pencil. Please fully explain how I show calculate not understanding how.
I don't understand this. Please thoroughly explain. Im trying to complete with paper and pencil. Please fully explain how I show calculate not understanding how. Trying to carry all calculations to two decimal places to reduce rounding error, especially in multistep problems.Integrative Case Enviro Plastics Company
Since its inception, Enviro Plastics Company has been revolutionizing plastic and trying to do its
part to save the environment. Enviro's 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, Enviro's
CFO closely monitors the firm's cost of capital. The CFO keeps tabs on each of the individual costs
of Enviro's 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:
At the present time, Enviro can raise debt by selling year bonds with a $ par value and a
annual coupon interest rate. Enviro's corporate tax rate is and its bonds generally
require an average discount of $ per bond and flotation costs of $ per bond when being sold.
Enviro's 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 firm's investment advisors believe that the appropriate riskfree rate is
and that the market's expected return equals Using data from through Enviro's
CFO estimates the firm's beta to be
Although Enviro's 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 Enviro's current aftertax cost of longterm debt.
b Calculate Enviro's current cost of preferred stock.
c Calculate Enviro's current cost of common stock.
d Calculate Enviro's 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 Enviro's common stock?
What would be Enviro's new cost of common equity?
What would be Enviro's new weighted average cost of capital WACC
Which capital structurethe original one or this oneseems better? Why?
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