Weighted Average Cost of Capital
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Exercise 1
The Director of Finance of Neolpharm Corporation needs to obtain financing for a major project expansion of the Corporation and is looking various alternatives, such as issue common Stocks, Preferred stocks and Debts (bonds). But he wants to obtain the Optimal Range of Financial Leverage. He is considering three alternatives of Investments as follow:
Alternative 1 Alternative 2 Alternative 3
Bonds (debts) 60% Bonds (debts) 25% Bonds (debts) 80%
Preferred Stocks 25% Preferred stocks 10% Preferred Stocks 5%
Common Stocks 15% Common Stocks 65% Common Stocks 15%
A. The bond financing information is as follow:
25 years bonds with face value of $10,000,000
Face Interest of 8%
Sold at Premium $10,500,000
Flotation cost of $200,000
Income tax bracket of 30%
Please calculate the cost of debt Capital
B. Cost of Preferred Stocks
Annual dividend $5.00
Preferred stock price at trading $50.00
Flotation cost of $4.00 per share
Please calculate the cost of preferred stocks
C. Cost of Common Stocks
Annual dividend per share last year $1.00
Common Stock price at trading $ 150.00
Flotation cost of $25.00 per share
Expected dividend growth Rate 8%
Please calculate the cost of Common Stock
D. Using each of the alternatives of Investments listed above and the cost of capital of debts, preferred and common stocks please calculate the Weighted Average Cost of Capital ( WACC) and provide your recommendation to Neolpharm's Director of Finance about which is the best alternative to obtain the Optimal Range of Financial leverage. Please provide the calculation for the cost of capital and WACC.
Exercise 2
Company ABC declared a dividend of $5.00 per common stocks which market price is $100.00. What is the cost of capital if the long term expected growth in dividends is projected to be 5%.
Exercise 3
CGA Inc. has a $20,000,000 of debt outstanding with a coupon rate of 10%. The yield to maturity is 8%. If CGA tax rate is 30%, what is the cost of debt?
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Solution Summary
1. Cost Of Debt Capital -
2. Cost of Preferred Stock and
3. Common stock
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Exercise 1
The Director of Finance of Neolpharm Corporation needs to obtain financing for a major project expansion of the Corporation and is looking at various alternatives, such as issue common Stocks, Preferred stocks and Debts (bonds). But he wants to obtain the Optimal Range of Financial Leverage. He is considering three alternatives of Investments as follow:
Alternative 1 Alternative 2 Alternative 3
Bonds (debts) 60% Bonds (debts) 25% Bonds (debts) 80%
Preferred Stocks 25% Preferred stocks 10% Preferred Stocks 5%
Common Stocks 15% Common Stocks 65% Common Stocks 15%
A. The bond financing information is as ...
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