DC computer Ltd has recently changed its target capital structure and expects to maintain it for future investments. This target capital structure is reflected in the current market value of the financing already undertaken: $272,000 in debt, $428,000 in preference shares and $400,000 in ordinary equity. The following data has been collected to calculate the new weighted marginal cost of capital.
1) 100,000 ordinary shares have been issued with the current market price of $4.00. $40,000 in dividends was paid out this year. Dividends are expected to grow at the annual rate of 5%. To float this new issue the firm would have to offer a discount of 0.30c per share below market price. The cost of such an issue is expected to be 0.20c per share.
2) 100,000 preference shares issued with a current market price of $4.28 each with dividends of 0.50c per share. Issue cost for preference shares is 2% of the market price.
3) The cost of debt (before tax and after issue costs) has been calculated as 12.72% pa. The firm's tax rate is 30%.
a) Calculate the weighted average cost of capital (WACC), which includes the cost of newly issued ordinary and preference share.
b) Discuss how much influence Financial Managers should put on the WACC.
c) How does the WACC compare to the SML and when should each be used.
Please see the attached file.
Yes you are correct, here we need to take the expected dividend per share. Expected dividend per share= Dividend *(1+growth rate)
Hence Revised ...
Solution helps in calculating the new weighted marginal cost of capital.
Implied Interest, Capital Structure, Payout Ratio & WACC
Q4 - Suppose the September CBOT Treasury bond futures contract has a quoted price of 89-09. What is the implied annual interest rate inherent in the futures contract?
a- 6.0 percent , b-6.5 percent, c-7.0 percent, d-7.5percent, e-8.0 percent. Please show all work and choose the best answer.
Q1 - Plato Inc. expects to have net income of $5,000,000 during the next year. Plato target capital structure is 35 percent debt and 65 percent equity. The company director budgeting has determined that the optimal capital budget for the coming year is $6,000,000. If Plato follows a residual dividend policy to determine the coming years dividend, then what is Plato's payout ratio? Please calculating the earnings that must be retained to stay at the target ratio, the residual amount available for dividends and the payout ratios.
Q7 - A consultant has collected the following information regarding Young Publishing:
Total Assets $4,000 Millions Tax rate 40%
Operating income (EBIT) $300 millions Debt ratio 0%
Interest expense 0 millions WAAC 10%
Net income $180 millions Marker Book value 1.0% 1.00%
Share price $32 EPS = DPS $3.20
The company has no growth opportunities (g=0), so the company pays out all its earnings as dividends (EPS = DPS) Young's stock price can be calculated by simply dividing earnings per share by the require return on equity capital, which currently equals the WACC because the company has no debt.
The consultant believes that the company would be much better off it were to change its capital structure to 40 percent debt and 60 percent equity. After meeting with investment bankers, the consultant concludes that the company could issue $1,200 million of debts at a before tax cost of 7 percent, leaving the company with interest expense of $84 million. The $1,200 million raised from the debt issue would be used to repurchase stock at $32per share. The repurchase will have no effect on the firm's EBIT; however, after the repurchase, the cost of equity will increase to 11 percent. If the firm follows the consultant's advice, what will be its estimated stock price after the capital structure change? Please calculate the current number of shares outstanding currently, the number of shares outstanding after repurchase, the new EPS after repurchase, and the new stock price. Please show all work and calculations.