Analysis of cost of equity-debt and debt financing accurate

Assignment Help Financial Management

Reference no: EM131020910

Christopher William, president of William Industries which produces widgets, has hired you to determine its cost of debt and the cost of equity capital. The stock currently sells for $25 per share and the dividend will be $5. Christopher argues that it will cost us $5 per share to use the stockholders money this year therefore the cost of equity is equal to 20%. Furthermore, Christopher believes that the cost of debt is 25%. This is based upon the most recent financial statements which show that William Industries has total liabilities of $10 million and will face total interest expenses for the year of $2.5 million. Christopher argues that the company should increase its use of equity financing because debt costs 25% while equity only costs 20% and thus equity is cheaper. Is Christopher’s analysis of the cost of equity, debt, and decision to increase the use of equity financing over debt financing accurate?

Reference no: EM131020910

Questions Cloud

Zero coupon bond with a face value-annual coupon payments : You are purchasing a 20 year, zero coupon bond with a face value of $1000. The yield to maturity is 7.2% based on annual coupon payments. What is the current market price?

Discuss the problem of choosing : A forester wants to estimate the total number of trees on a tree farm that have diameters exceeding 12 inches. A map of the farm is available. Discuss the problem of choosing what to sample and how to select the sample.

Why does that not lead to arbitrage opportunities : When a bond goes on special, the repo rate for borrowing against that bond goes below the General Collateral Rate (GCR) which applies to all other Treasury bonds. Why does that not lead to arbitrage opportunities?

Regardless of the direction of the interest rate change : When interest rates go up, duration based calculation shows that the value of the bond will go down and vice-versa. Why is the convexity adjustment always a positive amount regardless of the direction of the interest rate change?

Analysis of cost of equity-debt and debt financing accurate : Christopher William, president of William Industries which produces widgets, has hired you to determine its cost of debt and the cost of equity capital. The stock currently sells for $25 per share and the dividend will be $5. Is Christopher’s analysi..

Are costs of utilities always fixed are they always variable : Many firms consider their wage costs to be variable costs. Why, then, do publishers usually consider their wage and salary costs to be fixed costs? Are the costs of utilities always fixed, are they always variable, or can they be both? Briefly exp..

Possible sources for determining the population growth : What are some possible sources for determining the population growth and health risk factors for the areas in which many of the nurses find employment?

How project management contribute to the overall growth : Critically appraise and evaluate the contribution primary and secondary data sources can make to research studies, particularly with respect to sampling, statistical analysis and data presentation techniques.

Can conclude from information that apple is making profit : An article in Forbes discussed an estimate that the cost of materials in Apple's iPhone 5 with 64 gigabytes of memory was $230. Apple was selling the iPhone 5 for $849 (most phone carriers made payments to Apple that reduced the price to consumers..

User Account

All Pages