MyBigTurkey.com (MBT) began as an internet startup back in 1995. The company's initial focus was the on-line market for specialty holiday snack foods. After experiencing the tech 'crash' of 2000, company management refocused MBT's efforts and the company has experienced a significant rebound in sales. The company now focuses on providing specialty foods for use on cruise liners and first-class cabins on inter-continental airlines. MBT's entire business is now comprised of corporate customers such as Princess Cruise Lines and British Airways.

Thanks to solid sequential growth in sales, MBT recently underwent an IPO. The company's earnings have been growing at a relatively fast, yet consistent rate of 15 percent per year. MBT management believes that this growth rate is sustainable for the foreseeable future, based on the fact that they have a very well-crafted marketing mix and a very large potential market (mostly untapped today).

MBT has issued two series of bonds:

1. Series 1, 8% coupon, expiring in 10 years

2. Series 2, paying 9% coupon, expiring in 20 years

Currently, market yields on bonds similar to those issued by MBT are hovering at 10.5%.

MBT issued preferred stock several years ago, which is currently valued at $43.50 per share. Dividends per share on preferred stock are $2.00. the company has 5% of its total capital structure in preferred stock outstanding.

Common stock is selling on NASDAQ for $41.55 per share; the company has been paying an annual dividend to common shareholders of $.75 per share.

MBT's corporate tax rate is 36%. Currently 25% of the company's financing is in the form of common equity. 70% comes from debt. The company has $25 million in retained earnings. The company has determined that it will not issue further preferred stock.

Compute the following:

·      Cost of capital for:

·      Debt:

·      Preferred stock:

·      Common equity:

·      Compute the WACC:

NEXT, Re-Compute the weighted average cost of capital, assuming that:

1) The market yield on debt will increase by 2% points, and,

2) Only common stock is used in the capital structure along with the existing debt (assume preferred stock is replaced in the capital structure by the new common stock)

Answer rating: 100% (QA)

SOLUTION To compute the cost of capital for debt preferred stock and common equity as well as the weighted average cost of capital WACC for MyBigTurke... View the full answer