Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Your firm has estimated that it will spend $ 2 0 million on new capital budgeting projects during the coming year. You have been asked

Your firm has estimated that it will spend $20 million on new capital budgeting projects during the coming year. You have been asked to calculate the appropriate cost of capital to be used to analyze these projects and have collected the following information:
Your firm's targeted capital structure consists of 40 percent debt and 60 percent common equity.
Your firm expects to add $6.0 million to retained earnings over the coming year that can be used to support the $20.0 million in new projects.
CAPM is the correct model to use for the cost of retained earnings. The DCF/Gordon Growth equation with flotation costs is the correct framework to use for the cost of new equity.
The company has 10-year corporate bonds outstanding with a 8 percent annual coupon (paid semi-annually) that are trading at $1,043.81818755.
New debt can be issued as a private placement (no flotation expense) and will have the same level of risk as the firm's current debt.
The company's tax rate is 40 percent.
The risk-free rate is 4 percent, the market risk premium is 10 percent, and the stock's beta is 1.25.
The company expects to pay a dividend on its common stock of $4.80 per share next year ).
The company's ROE is 10% and its dividend payout rate is 70%.
If the firm issues new shares of common stock, they will sell at a discount of 3.0 percent from the current stock price. In addition, the firm will have to pay flotation expense of 10.0% of the discounted sales price per share.
Each of the projects to be taken on has the same degree of risk as the current projects of the firm.
What is the WACC of the first dollar to be raised? Enter your answer in decimal format, truncated to 4 decimal places. For example, if your answer is 10.876%, enter "0.1087".
image text in transcribed

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

Step: 3

blur-text-image

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

The Concepts And Practice Of Mathematical Finance

Authors: Mark S. Joshi

2nd Edition

0521514088, 9780521514088

More Books

Students also viewed these Finance questions