Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Pr Copper Corp. is a publicly traded company listed on the TMX. The company has 20,000,000 common shares outstanding and current stock price is $30

Pr Copper Corp. is a publicly traded company listed on the TMX. The company has 20,000,000 common shares outstanding and current stock price is $30 per share.

According to Pr Coppers balance sheet as at December 31st 20XX:

Pr Coppers has retained earnings of $25,700,000

Pr Copper has $200,000,000 preferred shares outstanding paying a 5.3% annual dividend. These preferred shares are owned by one of the companys main clients, TokyoTelecom, as part of a long-term strategic partnership. This partnership involves Pr Coppers commitment to supply TokyoTelecom with a certain quantity of copper at a certain price each year (these prices and quantities are revised regularly according to an agreed schedule).

Pr Copper has $300,000,000 of outstanding debt (bonds) paying a 5.5% annual coupon. These bonds were issued at par (face value = $1000) 2 years ago and have a remaining term to maturity is 8 years

The firms corporate tax rate is 30%.

Pr Copper is considering investing in a new project that will require external financing. The project is as risky as the existing operations of the firm.

Given current market circumstances, Pr Copper could raise new equity and debt under the following conditions:

Comparable 8 year corporate bonds issued at par are currently yielding 6.40% per annum. Thanks to its long-term agreement with TokyoTelecom, Pr Coppers bonds are perceived as less risky than similar corporate bonds. Therefore, the yield required by potential investors is 30 basis points lower than the yield required for other comparable corporate bonds. A 2.75% (after tax) underwriting fee (floatation costs) applies to new bond issues.

Pr Copper could issue new common shares at 5% discount from the current market price per share. Existing shareholders expect a 19.9% return on their investment.

New preferred shares could be issued with 5.9% yield. After tax issuing and underwriting fees are equal to 6.3% of par value.

Remember 1% = 100 basis points

What is Pr Copper Corp.s marginal cost of capital (MCC)?

Step 1: Calculate the cost to the firm for ki, kp and ke

Note: Calculate the ki in order to solve for the market value of the debt

Step 2: Find the market values of B, P and E

Step 3: Solve for the weights: B/V, P/V and E/V

Step 4: Calculate the MCC

Note: MCC = WACC for the next dollar raised (for a given capital structure)

Calculate the Cost of Debt ki (after tax and after flotation costs)- Coupon rate (new bonds) = comparable bond rates +/- risk premium/discount

Calculate the after tax annual coupon payment:

Calculate the net proceeds from the new bonds

Solve for the firms after tax cost of debt ki -

Calculate the Cost of Preferred Equity kp

Calculate the Preferred Dividend Dp

Calculate the Net Proceeds from issuing new preferred shares

Calculate the cost of Preferred Equity (kp) to 4 decimal place

Calculate the Cost of New Common Equity kne

Calculate the cost of new common equity kne (to 4 decimal places)

Calculate the Market Value Debt B to the nearest cent

Calculate the Market Value Preferred Equity P to the nearest cent

Calculate the Market Value Common Equity E to the nearest cent

Calculate the market value of the firm to the nearest cent

Calculate the Equity to Value E/V weight to 6 decimal places

Step 4: Calculate the MCC

Note: MCC = WACC for the next dollar raised (for a given capital structu

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Working Capital Management And Finance A HandBook For Bankers And Finance Managers

Authors: R.K.Gupta, Himanshu Gupta

4th Edition

1645875547, 9781645875543

More Books

Students also viewed these Finance questions

Question

7. Define cultural space.

Answered: 1 week ago

Question

8. Describe how cultural spaces are formed.

Answered: 1 week ago