Calculate cost of debt and cost of preferred shares, Cost Accounting

Assignment Help:

You have been asked by Mogul-Basher (MB) Ltd., a manufacturer of snowboards, to evaluate its capital structure. As a first step, you need to estimate MB's current weighted average cost of capital (WACC). You have been provided with the following information to complete this task.

MB currently has a $100 million face value long-term debt issue outstanding. The bonds have 4 years remaining until maturity, carry a 7% coupon, payable semi-annually, and have a current price of $105 per $100 face value bond. MB also has 5 million preferred shares outstanding. These shares are currently trading at $15 and carry a dividend of $1.25 per share. Finally, MB has 15 million common shares outstanding that are currently trading at $20. The beta on the common shares of MB is 1.10, the market price of risk is 6%, and the risk-free rate is 3%.

MB has been advised by its underwriters that flotation costs would be 5% after-tax on new debt and 6% before-tax on preferred shares and common shares. MB's marginal tax rate is 35%.

Required

a. Determine the appropriate weights to use in determining MB's WACC.

b. Calculate MB's cost of debt, cost of preferred shares, cost of internal equity, and cost of issuing new common equity.

c. Based on your calculations in parts (a) and (b), estimate the firm's WACC, assuming all of the required equity can be generated internally.

d. You have estimated that the firm will generate $1.5 million in internally-generated funds that are available to fund new investments. How much can the firm raise without issuing new equity, based on your previous calculations? What is the firm's marginal cost of capital (MCC) for financing required beyond this figure?


Related Discussions:- Calculate cost of debt and cost of preferred shares

What is subphylum uniramia, Tlie subphylum is called Uniramia because of t...

Tlie subphylum is called Uniramia because of the presence of unbranched appendages. These animals have non-jointed mandibles, uubranched appendages without any palps. They have

First in first out or fifo, First in First Out or FIFO FIFO method is ...

First in First Out or FIFO FIFO method is based upon the assumption such stock purchased first is issued first. Prices of stock purchased first are employed to determine the v

Distinction between absorption and marginal costing, Distinction between Ab...

Distinction between Absorption and Marginal Costing These are two approaches of arriving at the cost of production or total profit for a specified period. The major difference

What is wage rate, The employees at Warren Manufacturing Company are unioni...

The employees at Warren Manufacturing Company are unionized. As minimum requirements, the union members insist on keeping a work force of at least 300 workers, and accepting an hou

Assignment, what do you understand by cost accounting and what are the main...

what do you understand by cost accounting and what are the main decision areas that are involved

Prepare journal entries to record the budget, The budgeted and actual reven...

The budgeted and actual revenues and expenditures of Seaside Township for a recent year (in millions) were as presented in the schedule that follows: 1. Prepare journal entries

Estimate the manufacturing cost for bearing housing, Estimate the manufactu...

Estimate the manufacturing cost for a bearing housing following the Formula Student Costing Scheme.  Dimensions and materials of the bearing housing will depend on your student

How long does it acquire to implement fca?, It takes about two to three yea...

It takes about two to three years to fully execute FCA and get all employees comfortable with it. Even then, the process will still develop. In Greensboro, North Carolina, it took

Find the fixed cost, A firm's fixed costs for 0 units of output and its ave...

A firm's fixed costs for 0 units of output and its average total cost of producing different output levels are summarized in the table below. Complete the table to find the fixed c

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd