The Everest Company has Rs 200 million in total net assets at the end of 2009....

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The Everest Company has Rs 200 million in total net assets at the end of 2009. It plans to increase its production machinery in 2010 by Rs 50 million. Bond financing, at an 11 percent rate, will sell at par. Preferred will have an 11.5 percent dividend payment and will be sold at a par value of Rs 100. Common stock currently sells for Rs 50 per share and can be sold to net Rs 45 after flotation costs. There is Rs 10 million of internal funding available from retained earnings. Over the past few years, dividend yield has been 6 percent and the firm's growth rate is 8 percent. The tax rate is 40 percent. The present capital structure shown below is considered optimal: Debt: 4% coupon bonds 7% coupon bonds Preferred stocks Rs 4,00,00,000 4,00,00,000 Rs 8,00,00,000 Rs 2,00,00,000 Common stock (Rs 10 par) Rs 4,00,00,000 Retained earnings Rs 6,00,00,000 Equity Rs 10,00,00,000 Total Rs 20,00,00,000 Required: a. How much of the Rs 50 million must be financed by equity capital if the present capital structure is to be maintained? (3 Marks) b. How much of the equity funding must come from the sale of new common stock? c. Calculate the component cost of: (3 Marks) (4 Marks) i. New debt 11. New preferred stock 111. Retained earnings New equity iv. e. What would be Everest's weighted average cost of capital if only retained earnings were used to finance additional growth that is, if only Rs 20 million were raised? (3 Marks) f. What is the weighted average cost of capital when Rs 50 million is raised? (3 Marks) FINC 5101/Sept2020 Page 3 of 4 g. What is the weighted average cost of capital on the Rs 30 million raised over the Rs 20 million? (4 Marks) The Everest Company has Rs 200 million in total net assets at the end of 2009. It plans to increase its production machinery in 2010 by Rs 50 million. Bond financing, at an 11 percent rate, will sell at par. Preferred will have an 11.5 percent dividend payment and will be sold at a par value of Rs 100. Common stock currently sells for Rs 50 per share and can be sold to net Rs 45 after flotation costs. There is Rs 10 million of internal funding available from retained earnings. Over the past few years, dividend yield has been 6 percent and the firm's growth rate is 8 percent. The tax rate is 40 percent. The present capital structure shown below is considered optimal: Debt: 4% coupon bonds 7% coupon bonds Preferred stocks Rs 4,00,00,000 4,00,00,000 Rs 8,00,00,000 Rs 2,00,00,000 Common stock (Rs 10 par) Rs 4,00,00,000 Retained earnings Rs 6,00,00,000 Equity Rs 10,00,00,000 Total Rs 20,00,00,000 Required: a. How much of the Rs 50 million must be financed by equity capital if the present capital structure is to be maintained? (3 Marks) b. How much of the equity funding must come from the sale of new common stock? c. Calculate the component cost of: (3 Marks) (4 Marks) i. New debt 11. New preferred stock 111. Retained earnings New equity iv. e. What would be Everest's weighted average cost of capital if only retained earnings were used to finance additional growth that is, if only Rs 20 million were raised? (3 Marks) f. What is the weighted average cost of capital when Rs 50 million is raised? (3 Marks) FINC 5101/Sept2020 Page 3 of 4 g. What is the weighted average cost of capital on the Rs 30 million raised over the Rs 20 million? (4 Marks)

Answer rating: 100% (QA)

a To maintain the present capital structure the Rs 50 million must be financed by equity capital of Rs 10 million from retained earnings and Rs 40 mil... View the full answer