WA-wk64404 - The Expanding Capital Corporation has a current capital structure of $15 million PDF

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Uopeople T5, 2021 BUS4404: Principles of Finance II WA-WK 6: Application: Managing cost of capital Instructor: Prof. Thomas July 24, 2021The Expanding Capital Corporation has a current capital structure of $15 million in secured bonds paying 6% annual interest, $10 million in preferred stock with a ...

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Uopeople T5, 2021 BUS4404: Principles of Finance II WA-WK 6: Application: Managing cost of capital Instructor: Prof. Thomas July 24, 2021

The Expanding Capital Corporation has a current capital structure of $15 million in secured bonds paying 6.5% annual interest, $10 million in preferred stock with a par value of $50 per share and an annual dividend of $3.80 per share, and common stock with a book value of $75 million. It is about to issue new debentures in the amount of $10 million paying 7.5% annual interest. Its CFO says its marginal tax rate is 30% and its cost of common equity capital is 12%. Calculate the company’s Weighted Average Costs of Capital for the following: 1. Before the new bond issue Capital types

Amount $

Proportions

Cost

Bonds

15,000,000

15m/100m =15% 6.5 % or

WACC 0.68%

0.065(1-0.3) =0.0455 Preferred shares

10,000,000

10m/100m =

3.80/50 =0.076

0.76%

12% or 0.12

9

10% Common stock

75,000,000

75m/100m = 75%

Total

100,000,000

100%

10.44

Therefore the WACC before new bond issue =10.44

2. After the new bond issue Capital types

Amount $

Bonds

15,000,000

Proportions 15m/110m =13.63%

Cost

WACC

6.5 % or

0.62%

0.065(1-0.3) =0.0455

Preferred shares

10,000,000

10m/110m =

3.80/50 =0.076

0.69%

12% or 0.12

8.18%

9.09% Common stock

75,000,000

75m/110m =

68.18% Debentures

10,000,000

10/110 =9.09

7.5% or 0.075(1-

0.48%

0.3) = 0.0525 Total

110,000,000

100%

9.97%

Therefore the WACC after new bond issues is 9.97%

References Counttut ( Feb 10, 2019) WACC Weighted Average Cost of Capital | Explained with Example https://www.youtube.com/watch?v=3ZXT8GJ7d6w...