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

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?

Posted Date: 5/4/2013 2:34:58 AM | Location : United States







Related Discussions:- Calculate cost of debt and cost of preferred shares, Assignment Help, Ask Question on Calculate cost of debt and cost of preferred shares, Get Answer, Expert's Help, Calculate cost of debt and cost of preferred shares Discussions

Write discussion on Calculate cost of debt and cost of preferred shares
Your posts are moderated
Related Questions
#what is the formula for calculating payback period and what are its limitations ?

sums with solution of marginal costing

The value of un-sold stock. The stock is valued at cost or market price either is lower. Usually, the closing stock is not specified in the trial balance but is specified in adjust

Win Corporation sells a single product. Budgeted sales for the year are anticipated to be 609,725 units, estimated beginning inventory is 107,791 units, and desired ending inventor

Financial Statement Issues that are Unique to Manufacturers Different from the retailers, manufacturers have three exclusive inventory category: 1) Raw Materials, 2)Work in

M aterials mix variance :  It can be described as that portion of direct material usage variance which is the variation between the actual quantities of ingredients used in a mi

EARNINGS AFTER TAX-1500000 NUMBER OF EQUITY SHARE OUTSTANDING-300000 DIVIDEND PAID 600000 PRICE-EARNING RATIO-101 RATE OF RETURN ON INVESTMENT-20% WHAT IS OPTIMUM DIVIDEND PAY OUT

1. You are required to download the latest annual report published by one of the following institutions: - Adult Multicultural Education Services - Centre for Adult Education

1) Jodie received a $2000 college entrance scholarship. Nine month later Brian was awarded a $2100 academic proficiency scholarship for his outstanding grades in the first year of

Traditional budgeting  systems are  incremental  in nature and  tend  to  focus on  cost  centres.  Activity-based  budgeting  links  business  planning  to  the  budgeting  proces