You are provided the following information: Capital Structure: Debt $ 60000 Equity $ 180000 The
Question:
You are provided the following information:
Capital Structure:
Debt $ 60000
Equity $ 180000
The firm sold 50 year; $ 1000 face value, 5% bonds 10 years ago. These bonds trade at $ 930. You expect the yield on these bonds to be a good proxy for the cost of issuing new bonds.
The shares trade at $ 20; the growth rate is 6%. Dividends paid last year - $ 1.00.
The firm has a 30% tax rate.
Kemper, Goebel & Benkato, Investment Bankers have informed you that new shares can be sold with a 10% transaction cost.
New 50 year bonds can be sold. The firm can collect:
$ 0 -- $ 120000 6%
The firm added $ 180000 to retained earnings last year.
As the intern, compute the cost of capital {WACC} for the CFO.
f) How much can you borrow with the amount you have added to retained earnings last year? Note: NO change in capital structure.
g) Compute the WACC IF your CFO wants a ‘NEW’ capital structure with 60% debt. [use old costs]
h) What is the cost of equity when new shares are sold?
i. Compute the WACC if you borrow over $ 60001 with the ‘OLD’ capital structure.