Question
Lee Corp. needs to raise $240M external capital to finance a project by issuing $25M (21%)par value of preferred stocks, $80M par value of long-term
Lee Corp. needs to raise $240M external capital to finance a project by issuing $25M
(21%)par value of preferred stocks, $80M par value of long-term debt, and financing the balance with new issue of common stocks that have a stock beta of 1.40.Its 15-year 9% coupon bonds, which pay semiannual coupons, are priced at 105% of the par value.Its preferred stocks have an 8% annual dividend rate on a par value of $50, and are priced at $56 each.Assume that the capital market is pricing all financial securities at their respective fair values, and the risk free return and market risk premium are, respectively, 3% and 11%.
(a)Calculate the weighted average cost of capital (WACC), which is based on the market values of financial securities issued, for Lee Corp. assuming that the marginal corporate tax rate is 35%.
(b)The flotation costs for raising new debt capital, preferred stock capital and common equity capital are, respectively, 4%, 7% and 15%.Besides, this $240M project is expected to generate a NPV of $23M without accounting for the flotation costs.Calculate the weighted average flotation cost, and the NPV of this project after taking into account of the flotation costs.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started