These Mini Cases are available in MyFinanceLab. 9-1. TBC Bank, based in Georgia, is growing rapidly since 2010, it introduced regional branches in South Caucasus, has been rated as the best corporate bank in region and listed on London international stock market. Nowadays Bank is expanding activi- ties and needs 50,000,000 USD; Bank has reserve in retained earnings in amount of $15,000,000, which will be used for new projects. The CFO argued to issue bonds to finance the rest of $35,000,000. Since the bank is in a good financial shape. There would not be any doubt regarding leverage issues; however, he also keeps in mind that in future TBC may need to issue stocks to maintain the proper capital structure. Target capital structure is 40 percent of debt and 60 percent of equity finance. The bank has the following bonds outstanding: par value $1,000, 10 percent coupon rate and matu- rity of 15 years. Market price of bonds is $1,100; common stock is traded at $25, paying $1.50 dividend, which is expected to grow at 5 percent; marginal tax rate is 20 percent; bond floatation cost is $15; and the stock floatation cost is $1. a. Calculate TBC bonds yield to maturity under market conditions. b. What will be the cost of new debt finance? Take floatation costs into consider- ation. c. What is your estimate of the cost of new equity financing raised from the sale of common stock? d. Compute WACC. e. Compute WACC if Bank maintains the target capital structure. f. What you will advise the bank CEO and shareholders? 9-2. ExxonMobil (XOM) is one of the half-dozen major oil companies in the world. The firm has four primary operating divisions (upstream, downstream, chemical, and global services) as well as a number of operating companies that it has acquired over the years. In 2009 ExxonMobil acquired XTO Energy for $41 billion. The XTO acquisition gave ExxonMobil a significant presence in the development of domestic unconventional natural gas resources, including the development of shale gas for mations, which was booming at the time. Assume that you have just been hired to be an analyst working for ExxonMobil's chief financial officer. Your first assignment is to look into the proper cost of capital for use in making corporate investments across the company's many business units. a. Would you recommend that ExxonMobil use a single company-wide cost of cap- ital for analyzing capital expenditures in all its business units? Why or why not? b. If you were to evaluate divisional costs of capital, how would you go about estimating these costs of capital for ExxonMobil? Discuss how you would ap- proach the problem in terms of how you would evaluate the weights to use for various sources of capital as well as how you would estimate the costs of individual sources of capital for each division
