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Module Spreadsheet Saint Leo
Saint Leo Manufacturing is going to introduce a new product line and to accomplish this. It has four projects analyzed in which it wants to invest a total of $100 million. Your job is to find what it will cost to raise this amount of capital and based on the cost of capital determine which of the projects should be accepted by the firm to invest in.
A B C D
INVESTMENT $30,000,000 $20,000,000 $25,000,000 $25,000,000
EXPECTED RETURN 10.00% 14.00% 11.50% 16.00%
The firms capital structure consists of: FMV
CAPITAL PERCENTAGE AMOUNT
DEBT 30% $15,000,000
PREFERRED STOCK 10% $5,000,000
COMMON STOCK 60% $30,000,000
Other information about the firm:
CORPORATE TAX RATE 30%
CURRENT PRICE $1,050.00
ANNUAL INTEREST 6.00% CURRENT INTEREST PAID SEMIANNUALLY
ORIGINAL MATURITY 25 YEARS, BUT NOW 20 YEARS LEFT
MATURITY VALUE $1,000.00
FLOTATION COST INSIGNIFICANT
MARKET YIELD PROJECTED:
UP TO $20 MILLION 9%
ABOVE $20 MILLION 12% 3 % additional premium
CURRENT PRICE $45.00
LAST DIVIDEND (D0) $3.38 FIXED AT 7.5% OF PAR
FLOTATION COST $1.50
NEXT DIVIDEND (D1) $3.38
CURRENT PRICE $35.00
LAST DIVIDEND (D0) $1.00
RETAINED EARNINGS $10,000,000
GROWTH RATE (g) 9%
FLOTATION COST $1.50
NEXT DIVIDEND (D1) $1.090
NOTE - Once retained earnings is maxed out new common stock will need to be issued.
Any preferred stock would be new preferred stock. You may want to review case in chapter 11.
In all of the required parts one part builds on the previous part. If you can't do a part use the set of other numbers to solve the next part.
a. What is the current Kd, Kp and Ke assuming no new debt or stock?
b. Since any new capital investment will require issuing new perferred stock, what would the the new returns be preferred stock (knp) and the new cost of capital?
c. What amount of increase (marginal cost of capital) in capital structure will the firm run out of retained earnings and be forced to issue new common stock?
d. If new common stock has to be issued what will the new return required be (Kne) and the new cost of capital?