Lee Corp. uses the following sources of capital to finance its investment project: DEBT: 140,000 units...

 

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Lee Corp. uses the following sources of capital to finance its investment project: DEBT: 140,000 units of 15-year 9% coupon bonds that are currently selling at the price quote of 105 apiece. In addition, 50,000 units of 10-year 6% coupon bonds that are priced at 78 apiece. Both bonds pay coupons semi-annually! COMMON STOCK: 5,000,000 shares of common stock that is priced at $51.0 per share. Lee Corp. just paid $4.20 annual dividends per share, which is expected to grow annually at 7% indefinitely. Compute the weighted average cost of capital (WACC) for Lee Corp., given that the marginal tax rate is 35% and the book value of equity is $150M. Assume that all securities are fairly priced! (a) (b) Say, the flotation costs for issuing new debt and common stock are, respectively, 4% and 18%. Without accounting for flotation costs, the initial outlay and NPV of the project are estimated to be $435M and $55M, respectively. Compute the weighted average flotation cost, and the NPV of this project after taking into account of the flotation costs. Lee Corp. uses the following sources of capital to finance its investment project: DEBT: 140,000 units of 15-year 9% coupon bonds that are currently selling at the price quote of 105 apiece. In addition, 50,000 units of 10-year 6% coupon bonds that are priced at 78 apiece. Both bonds pay coupons semi-annually! COMMON STOCK: 5,000,000 shares of common stock that is priced at $51.0 per share. Lee Corp. just paid $4.20 annual dividends per share, which is expected to grow annually at 7% indefinitely. Compute the weighted average cost of capital (WACC) for Lee Corp., given that the marginal tax rate is 35% and the book value of equity is $150M. Assume that all securities are fairly priced! (a) (b) Say, the flotation costs for issuing new debt and common stock are, respectively, 4% and 18%. Without accounting for flotation costs, the initial outlay and NPV of the project are estimated to be $435M and $55M, respectively. Compute the weighted average flotation cost, and the NPV of this project after taking into account of the flotation costs.

Answer rating: 100% (QA)

Lee Corps WACC and Project NPV Part a WACC Calculation Step 1 Calculate Cost of Debt Debt 1 Face val... View the full answer