Question
Nick Denlinger owns a thriving wood pulp processing plant. He has inherited the business from his Uncle Woody but it is not the glamorous industry
Nick Denlinger owns a thriving wood pulp processing plant. He has inherited the business from his Uncle Woody but it is not the glamorous industry that he had aspired too during his collegiate career at Keiser University.
Nick has an opportunity to start a new cosmetic lipstick line based on wood pulp. He needs to determine the current weighted cost of capital and the revised weighted cost of capital with the new more glamorous product line.
Since Mr. Denlinger has hired many of his college classmates to work for his company, he decided that you were the best in corporate finance and wants you to evaluate and submit your findings to him (the president). Your entire corporate future with Uncle Woodys Pulp Processing and Lipstick Corporation depends on this project being completed correctly.
He offers you the following data:
Common Stock 50,000 shares @ $70 per share
Preferred Stock $6,000,000 @ 8.75%
Current Long-Term Debt $8,000,000 @ 6%
The company stock has increased in value at 9.25% per year.
The cost of the new lipstick operation is $5,000,000.
An additional bank loan may be available at 7.5%.
New stock could be issued at actual value (authorized to an additional 50,000 shares maximum).
Define the current weighted cost of capital.
Define the weighted cost of capital if the entire 5,000,000 is raised by new common stock issued.
Define the weighted cost of capital if an additional bank loan is obtained for the entire expansion project.
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