Question
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
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