Question

FINANCIAL MANAGEMENT 2 TUTORIAL 2 Gbagadi Incorporation wants to ascertain its overall cost of capital. The company is in the 30% tax bracket, the financial manager has gathered the following information: Common stock: the company common stock is currently selling for $15 per share. Expects to pay dividend of $0.50 per share in the next year. The company dividend has been growing at an annual rate of 8% and this rate is expected to continue in the future. The company is expected to have $500,000 of retained earnings available in the coming year, once these retained earings are exhausted, the firm will issue new common stock The new common stock will be underpriced by 0.50 per share, and the floatation costs are $0.30 per share. Preferred stock: The company issue 10% of preferred stock at its $100per share value The cost of issuing and selling the preferred stock is expected to be $2 per share. Long term Debt; The Company can raise debt issuing $1,000 par value, 12% coupon interest rate, 10-year bonds. It has to sell the bond at a discount of $20 per bond and must pay the floatation costs of $15 per bond.

Answer 1

overall Answer .. The incorporation wants to ascertan id Cost of capital cost of common equity (ked =(0, 1049 Na yer Dividere con rag dividend growth sate= 9 =8%. share price aP = 15 ke = (B, 1pJx 10049 -10:50/15)x100+ 8% -0,03 x100 +8%. kez Next = 0.03X100 - 11.33% year divdend / Motales cast) x 100 + gook Sharper

-1 0-150%Lit Ear) x (1-3) X100 +84 14-50 70.54 X100 484 14:07 11.841 Kp = Annual perference Dividend set Proceeds - Face Valux Preferent duid I100x10 310.00 Net proceeds - Face Value - Discount - lost of blatale a 100 - 2 = 98 kp. z 10 x 100 98 = 10-20% - Coupon payment & Face valu. Net Procoed cost of long term Arki wo of year Face vale + Net proced 2

Face value = 1000 E 1000 X 12 = 120 & Face valep - Discount a Cast of flotation = 1000-20-15 No of - 965 year = 10 . 17120 + (1000 -965) 10 1000 +965 = 120+ 35 1965 9 . = 120+ 3.5 982.5 123.5 982.5 ..: 1257

Individueel cost : Cast of common equity 11.84) Cast of poference stock - 10.20 cost of long tern of Do) = 12.57 WACG Calculation of WACC. Particular Ik Weigl cost of comm equity cost of perferons, stock 10.201 | 15% (kx wight) 11.84 11184 X55 - 6.51). 10.20415 51.53% Cost of long Teom er) | 1257 | 361 12.57 x 30 1257 23.79 100 11, 812 the calceilale of w icc al revised loeght cost of common equte 11.8h/ 35% 11.84835 = heille! Li n ence stock 10.20% 18% 10:20X15 =153)

cost or long Term (Pol.12.59% 50% 12.57450 = 6.29% WACC 100%. 11. 96%