Question

Question 18 is worth 15 points 18.Black Diamond, Inc., a manufacturer of carbon and graphite products for the aerospace and transportation industries, is considering several funding alternatives for an investment project. To finance the project, the company can sell 1,000 15-year bonds with a S1,000 face value, 7% coupon rate. The bonds require an average discount of $50 per bond and flotation costs of $40 per bond when being sold. The company can also sell 5,000 shares of preferred stock that will pay a $2 dividend per share at a price of S40 per share. The cost of issuing and selling preferred stocks is expected to be $5 per share. To calculate the cost of common stock, the company uses the dividend discount model. The firm just paid a dividend of S3 per common share. The company expects this dividend to grow at a constant rate of 3% per year indefinitely. The flotation costs for issuing new common shares are 7%. The company plans to sell 10,000 shares at a price of S50 per share. The company's tax rate is 40% Calculate the company's after-tax cost of long-term debt b) Calculate the Company's cost of preferred equity c) Calculate the company's cost of common equity d) Calculate the company's weighted average cost of capital What is the company's weighted average cost of capital without flotation costs?

I need someone to show me step by step explanations. If you use excel please attach two photos, one showing the results in each cell. Plus another photo showing the formula in the cell. Also please highlight the results for a, b, c and d.

Answer 1

A. Cost of Debt After Tax

After Tax Cost of Debt (Kd) =

Interest(1-Tax Rate)+ (Redemption Value-Nd Proceed) numbero f years (Redemption Value+Net Proceed)

Net Proceeds = The total amount per Bond that company will fetch. In this case 1000- 50(Discount) - 40(Flotation Cost) = 910

So Kd =

(1000x7/100) 1-0.40)+ (1000-910) (1000+910) 15

=(42+6)/(955) = 5.026% = 5.03%

B. Cost of Preference Share

Kp = Annual Preference Dividend / Net Proceed

Net Proceed = 40 issue Price - 5 Flotation and selling cost = 35$

So, Kp = 2/35*100 = 5.71%

C. Cost of Common Stock

Ke =

DI Peta

Where D1 = Proposed Divided = 3 * 1.03=3.09

Po = Net proceed from issuing Common Share = 50 - (50*7/100) = 50-3.5 = 46.5

G= Growth rate = 3%

= (3.09/46.5) + 3% = 9.65%

Particular	Formula	Cost
Cost of Debt	((((1000*7/100)*(1-0.4))+((1000-910)/15)))/((1000+910)/2)*100	5.03%
Cost of Preference Share	(2/35)*100	5.71%
Cost of Common Stock	(3*1.03)/(50-(50.7/100)+0.03	9.65%

D. Weighted Average Cost of Capital (WACC) is calculated by considering weight to particular loan with respect to total loan and multiplying with particular cost.

Source of Capital	Formula	Book Value	Weight	Cost of Capital	WACC %(Weight * Cost of Capital)
Bond	1000*1000	1000000	0.590	5.03%	2.97%
Preference Share	5000*40	200000	0.120	5.71%	0.69%
Common Stock	10000*50	500000	0.290	9.65%	2.80%
Total		1700000	1.000		6.45%