Newrock Manufacturing Inc. has the following target capital structure Debt ..............25% Preferred ............ 20 Equity ............. 55

Question:

Newrock Manufacturing Inc. has the following target capital structure

Debt ..............25%

Preferred ............ 20

Equity ............. 55

Investment bankers have advised the CFO that the company could raise up to $5 million in new debt financing by issuing bonds at a 6.0% coupon rate; beyond that amount, new debt would require a 7.0% coupon. Newrockâ€™s 8.5% preferred stock, issued at a par value of $100, currently sells for $112.50. There are 3 million shares of common stock outstanding on which the firm paid an annual dividend of $2.00 recently. The stock currently trades at $36.00 per share. Next yearâ€™s net income is projected at $14 million and management expects 6% growth in the foreseeable future. Flotation costs are 6% on debt and 11% on common and preferred stock. The marginal tax rate is 40%.

a. Calculate the WACC using the target capital structure and the cost of retained earnings for the equity component.

b. Plot Newrockâ€™s MCC identifying the levels of funding at which the first two breaks occur, and calculate the WACCs after each break.

c. Newrock has identified the following capital projects for next year:

Newrock Manufacturing Inc. has the following target capital stru

Projects A and B are mutually exclusive, as are Projects C and H. Plot the IOS and the MCC and determine the ideal size of next yearâ€™s capitalprogram.

Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on... Capital Structure
Capital structure refers to a company’s outstanding debt and equity. The capital structure is the particular combination of debt and equity used by a finance its overall operations and growth. Capital structure maximizes the market value of a... Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a... Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their... Par Value
Par value is the face value of a bond. Par value is important for a bond or fixed-income instrument because it determines its maturity value as well as the dollar value of coupon payments. The market price of a bond may be above or below par,...