In line with the end result of the Kunt and Maks model, The Middle East Company (MEC)
Question:
In line with the end result of the Kunt and Maks model, The Middle East Company (MEC) has estimated its financial needs in 2021. The EFN is anticipated to be $215,000,000 which will increase the total liabilities by 20% and the financial leverage will be 57%. The management is planning to raise 40,000,000 from the City Bank under nominal interest rate of 5%. To issue bonds, the MEC has given incentive to bond investors by giving 10% more on the prevailing RRR of 14%. The bond face value is $1,000 and it is projected that 50,000 will be purchased. The MEC Co. has maintained a retained earning ratio of 65% coming to the total of $76,000,000. MEC management opts for the option to invite Ramada Corporation as a preference shareholder under dividend per share of $200 and share value of 1,500 for 40,000 preference shares.
The RRR of the common shareholder is built around CAPM in the sense that the rf is projected to be 7% which equals 72% of the ERM under 1.62 Beta. The Co. will issue common shares for the remaining part of its financial needs under RRR of 10%. MEC is operating business in the tax-oriented economy with BPT of 16% and tax exemption of 40%.
Required:
1. Find out the WACOC of the MEC in securing its financial needs.
2. What would be the case if Ramada declines the offer and the common shareholders take the role under the same RRR of common shares?
3. What would be the WACOC if the EFN increased by 12% and the incremental fund will be secured by more bank borrowing under the 6% interest rate. Other things remain the same.
Foundations in Microbiology
ISBN: 978-0073375298
8th edition
Authors: Kathleen Park Talaro, Barry Chess