NEED HELP PLEASE!!!!
Integrative Case 4 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 2015 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: long-term 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 Long-term debt 30% Preferred stock 20 Common stock equity 50 Total 100% At the present time, Enviro can raise debt by selling 20-year bonds with a $1,000 par value and a 10.5% annual coupon interest rate. Enviro's corporate tax rate is 21%, and its bonds generally require an average discount of $45 per bond and flotation costs of $32 per bond when being sold. Enviro's outstanding preferred stock pays a 9% dividend and has a $95- per-share par value. The cost of issuing and selling additional preferred stock is expected to be $7 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 risk-free rate is 4% and that the market's expected return equals 13%. Using data from 2015 through 2021, Enviro's CFO estimates the firm's beta to be 1.3. Although Enviro's current target capital structure includes 20% preferred stock, the company is considering using debt financing to retire the outstanding preferred stock, thus shifting their target capital structure to 50% long-term debt and 50% common stock. If Enviro shifts its capital mix from preferred stock to debt, its financial advisors expect its beta to increase to 1.5. To Do a. Calculate Enviro's current after-tax cost of long-term debt. b. Calculate Enviro's current cost of preferred stock. To Do a. Calculate Enviro's current after-tax cost of long-term 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. 1. Assuming that the cost of debt financing does not change, what effect would a shift to a more highly leveraged capital structure consisting of 50% long- term debt, 0% preferred stock, and 50% common stock have on the risk premium for Enviro's common stock? 2. What would be Enviro's new cost of common equity? 3. What would be Enviro's new weighted average cost of capital (WACC)? 4. Which capital structure-the original one or this one-seems better? Why? Integrative Case 4 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 2015 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: long-term 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 Long-term debt 30% Preferred stock 20 Common stock equity 50 Total 100% At the present time, Enviro can raise debt by selling 20-year bonds with a $1,000 par value and a 10.5% annual coupon interest rate. Enviro's corporate tax rate is 21%, and its bonds generally require an average discount of $45 per bond and flotation costs of $32 per bond when being sold. Enviro's outstanding preferred stock pays a 9% dividend and has a $95- per-share par value. The cost of issuing and selling additional preferred stock is expected to be $7 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 risk-free rate is 4% and that the market's expected return equals 13%. Using data from 2015 through 2021, Enviro's CFO estimates the firm's beta to be 1.3. Although Enviro's current target capital structure includes 20% preferred stock, the company is considering using debt financing to retire the outstanding preferred stock, thus shifting their target capital structure to 50% long-term debt and 50% common stock. If Enviro shifts its capital mix from preferred stock to debt, its financial advisors expect its beta to increase to 1.5. To Do a. Calculate Enviro's current after-tax cost of long-term debt. b. Calculate Enviro's current cost of preferred stock. To Do a. Calculate Enviro's current after-tax cost of long-term 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. 1. Assuming that the cost of debt financing does not change, what effect would a shift to a more highly leveraged capital structure consisting of 50% long- term debt, 0% preferred stock, and 50% common stock have on the risk premium for Enviro's common stock? 2. What would be Enviro's new cost of common equity? 3. What would be Enviro's new weighted average cost of capital (WACC)? 4. Which capital structure-the original one or this one-seems better? Why
