The balance sheet that follows indicates the capital structure for Nealon Inc Flotation costs are (a) 15 percent of market value for a new bond issue, and (b) $2 01 per share for preferred stock The dividends for common stock were $2 50 last year and are projected to have an annual growth rate of 6 percent The firm is in a 34 percent tax bracket What is the weighted average cost of capital if the firms finances are in the following proportions TYPE OF FINANCING PERCENTAGE OF FUTURE FINANCING Bonds (8 , $1,000 par, 16 year maturity) 38 Preferred stock (5,000 shares outstanding, $50 par, $1 50 dividend) 15 Common equity 47 Total 100 a) Market prices are $1,035 for bonds, $19 for preferred stock, and $35 for common stock There will be sufficient internal common equity funding (i e , retained earnings) available such that the firm does not plan to issue new common stock Calculate the firms weighted average cost of capital b) In part (a) we assumed that the Nealon would have sufficient retained earnings such that it would not need to sell additional common stock to finance its new investments Consider the situation now, when Nealons retained earnings anticipated for the coming year are expected to fall short of the equity requirement of 47 percent of new capital raised Consequently the firm foresees the possibility that new common shares will have to be issued To facilitate the sale of shares, Nealons investment banker has advised management that they should expect a price discount of approximately 7 percent, or $2 45 per share Under these terms, the new shares should provide net proceeds of about $32 55 What is Nealons cost of equity capital when new shares are sold, and what is the weighted average cost of the added funds involved in the issuance of new shares

Question

The balance sheet that follows indicates the capital structure for Nealon Inc  Flotation costs are (a) 15 percent of market value for a new bond issue, and (b) $2 01 per share for preferred stock  The dividends for common stock were $2 50 last year and are projected to have an annual growth rate of 6 percent  The firm is in a 34 percent tax bracket  What is the weighted average cost of capital if the firms finances are in the following proportions  TYPE OF FINANCING PERCENTAGE OF FUTURE FINANCING Bonds (8 , $1,000 par, 16 year maturity)               38  Preferred stock (5,000 shares outstanding, $50 par, $1 50 dividend)    15  Common equity                          47  Total                            100  a) Market prices are $1,035 for bonds, $19 for preferred stock, and $35 for common stock   There will be sufficient internal common equity funding (i e , retained earnings) available such that the firm does not plan to issue new common stock   Calculate the firms weighted average cost of capital  b) In part (a) we assumed that the Nealon would have sufficient retained earnings such that it would not need to sell additional common stock to finance its new investments  Consider the situation now, when Nealons retained earnings anticipated for the coming year are expected to fall short of the equity requirement of 47 percent of new capital raised  Consequently the firm foresees the possibility that new common shares will have to be issued  To facilitate the sale of shares, Nealons investment banker has advised management that they should expect a price discount of approximately 7 percent, or $2 45 per share  Under these terms, the new shares should provide net proceeds of about $32 55  What is Nealons cost of equity capital when new shares are sold, and what is the weighted average cost of the added funds involved in the issuance of new shares

SolutionInn · Accepted Answer

a Computation of the Weighted Average Cost of Capital Cost of Debt 1035 1 15 87975 NP0 ...

Question: The balance sheet that follows indicates the capital structure for Nealon Inc. Flotation costs are (a) 15 percent of market value for a new bond

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68-B-E-M-E (450).xlsx

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