$1$: PhillyFlooring is looking to go public with an IPO. In order to raise funds so the company can

expand beyond the Philadelphia area, they will issue bonds and common stock. They have hired

a local financial consultant who will charge a fee $($or flotation cost$)$ for handling the IPO. The

flotation costs are $5\%$ of the suggested bond price and $3\%$ of the projected stock price. Given

the following and a $20\%$ corporate tax rate, calculate the cost of capital for each security and in

total for the IPO. Use the Dividend Growth Model for the stock.

Suggested Bond price $=$ $$905($$$1,000$ Face Value$)$ before flotation cost

Suggested Bond term $=4$ years

Suggested Bond Coupon rate $=3\mathrm{.}5\%$

Projected Stock Price $=$ $$25/$share before flotation cost

Projected Stock Dividend $=$ $$0\mathrm{.}70$ per share

Growth rate $=8\%$

kb before flotation cost $=$ kb after flotation cost $=$

kcs before flotation cost $=$ kcs after flotation cost $=$

What would be the dividend if kcs equaled $10\%?$

$2$: A year later and since the IPO, PhillyFlooring has generated the following in equity:

Total Bond Equity $=$ $$10,000,000$

Total Common Stock Equity $=$ $$15,000,000$

Total Equity $=$ $$25,000,000$

Based on the cost of capital for each security, now calculate the weights for each and the

Weighted Average Cost of Capital after flotation cost.

WACC $=$

$3$: How would your WACC change by calculating the kcs by using the CAPM? Assume a risk free rate

of $5\%,$ a Beta of $1\mathrm{.}25$ and market return rate of $4\%.$

WACC $=$