# WACC and Expected cost of new equity

The CEO of the company below would like to know the companyÃ¢??s current weighted average cost of capital and the expected cost of new equity if the company were to issue new shares. I need you to see the steps to calculate this and list any assumptions.

I have been provide the information below:

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The riskless rate is 4% and the expected return on the market is 8%. APPS4U has a tax rate of 40%. The companyÃ¢??s policy is to use its WACC as the reinvestment and financing rate when computing MIRRs.

APPS4U has 2.5 million shares outstanding, currently trading in the market at a price of $36 per share.

The most recent dividend on these shares was $2.25. The market expects dividends to grow at a 4% rate.

The company has two outstanding debt issues. The first has a $55m face value, a 10-year maturity, an 8% coupon rate, and a YTM of 7%. The second issue is a 6-year zero coupon bond with face value $80m.

This bond is currently trading at a price of $50m.

The company is considering issuing an additional 500,000 shares of common stock. It estimates flotation costs would be $3 per share.

The companyÃ¢??s CFO is currently considering two possible capital budgeting projects. Information concerning these projects is given in the below table.

Annual Project Cashflows

Project Beta 0 1 2 3 4 5

A 1.25 -1,250,000 -650,000 950,000 1,100,000 750,000 650,000

B 0.75 -1,800,000 900,000 700,000 400,000 400,000 750,000

https://brainmass.com/business/weighted-average-cost-of-capital/wacc-expected-cost-new-equity-364662

#### Solution Preview

See the attached file. Thanks

WACC

The CEO of the company below would like to know the companyÃ¢??s current weighted average cost of capital and the expected cost of new equity if the company were to issue new shares. I need you to see the steps to calculate this and list any assumptions.

The riskless rate is 4% and the expected return on the market is 8%. APPS4U has a tax rate of 40%. The companyÃ¢??s policy is to use its WACC as the reinvestment and financing rate when computing MIRRs.Â

APPS4U has 2.5 million shares outstanding, currently trading in the market at a price of $36 per share.Â

The most recent dividend on these shares was $2.25. The ...

#### Solution Summary

Shows how to calculate the weighted average cost of capital and the expected cost of new equity if the company were to issue new shares. Also shows how to take capital investment decisions.