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QUESTION 2: Dover Port Terminal reported after-tax earnings available to common stockholders of $6,400,000. From these earnings, Dover paid a dividend of $0.50 on each
QUESTION 2: Dover Port Terminal reported after-tax earnings available to common stockholders of $6,400,000. From these earnings, Dover paid a dividend of $0.50 on each of its 6,000,000 common shares outstanding. The company has determined its optimal capital structure which is composed of the following sources and target market value proportions. Source of Capital Target Market Proportion Long-Term Debt 60% Common Stock 40% Debt: Dover can issue $1,000 par value, 8% coupon (with interest paid annually), 10-year bonds that can be sold at par. Flotation cost would amount to $20 per bond. Dover tax rate is 30%. Common Stock: The market price for the common stock is $3.60 and dividends are expected to grow at a rate of 8% per year for some foreseeable future. New common stock issue will attract a flotation cost of $0.40 per share. a) What is Dover WACC if equity capital comes from retained earnings? (9 marks) b) What is the new WACC when retained earnings are exhausted? (7 marks) c) At what level of total financing will cost of equity increase that will lead to an increase in WACC as determined in questions (a) and (b) above? (4 marks) QUESTION 2: Dover Port Terminal reported after-tax earnings available to common stockholders of $6,400,000. From these earnings, Dover paid a dividend of $0.50 on each of its 6,000,000 common shares outstanding. The company has determined its optimal capital structure which is composed of the following sources and target market value proportions. Source of Capital Target Market Proportion Long-Term Debt 60% Common Stock 40% Debt: Dover can issue $1,000 par value, 8% coupon (with interest paid annually), 10-year bonds that can be sold at par. Flotation cost would amount to $20 per bond. Dover tax rate is 30%. Common Stock: The market price for the common stock is $3.60 and dividends are expected to grow at a rate of 8% per year for some foreseeable future. New common stock issue will attract a flotation cost of $0.40 per share. a) What is Dover WACC if equity capital comes from retained earnings? (9 marks) b) What is the new WACC when retained earnings are exhausted? (7 marks) c) At what level of total financing will cost of equity increase that will lead to an increase in WACC as determined in questions (a) and (b) above? (4 marks)
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