ABC Company is a thriving company that sells car accessories. During 2020, the company encountered tremendous increases
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- ABC Company is a thriving company that sells car accessories. During 2020, the company encountered tremendous increases in sales and earnings. Because of this, the CFO wants to make sure that the money available is optimized. The policy of the company is to retain the following capital structure: 30%-Long-term debt; 10% preferred stock, and 60% common stock for the next 3 years. The company’s tax rate is 40%. Due to limited funds, projects have to be chosen out of the various opportunities for investments presented by the managers of each division to the CFO. Investment Opportunity A (IOA) has an internal rate of return of 15% with an investment cost of P400,000. IOB-22%, P200,000; IOC-25%, P700,000; IOD-23%, P400,000; IOE-17%, P500,000; IOF-19%, P600,000; IOG-14%, P500,000. Other data that the CFO considered are the following: For Long-Term Debt, the firm can obtain an additional P450,000 by issuing a P1,000 par value bond with to be repaid for 15 years.
- The bond’s current selling price is P960. The company’s annual percentage of coupon interest is based on its competitor’s bond’s details wherein the competitor’s bond’s selling price is P1,039.9271 with a yield to maturity of 8%, a par value of P1,000, and to be repaid within 5 years. In excess of P450,000 ABC Company will incur a before-tax cost of debt equivalent to the rounded-off cost of debt within the P450,000 range plus 7.33%.
- Preferred stock shall also be issued at P65 per share with a par value of P70 and a 14% dividend rate per annum. For Common Stock Equity, the company anticipates that its dividend per share in 2021 shall be P.96 while its earnings per share shall be P3.20. The amount of net income available to common stockholders is P500,000 while the average total common equity is P2,500,000. Further, the company observes a 55% retention ratio. The current selling price of its stock is P12 per share. In the coming year, the company anticipates Retained Earnings to reach P1,500,000. After the retained earnings are used up, additional funds can be obtained by the firm through additional common stock issuance at P9 per share (net).
- Requirement:
- WACC within the range of P0 to P1,500,000.
Related Book For
Principles of managerial finance
ISBN: 978-0132479547
12th edition
Authors: Lawrence J Gitman, Chad J Zutter
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