Question

show all work pleae withot using excel.

instructions: Show all of your work for maximum credit. You may use a financial calculator and show your entries (i.e., FV = 1000, ete). There are 20 points possible. 1. (10 points) Moose River Industrial is in the process of expanding and raising new capital through an initial public offering of common equity. The company has a target capital structure consisting of a debt to value (wa) ratio of 30%. A current debt issue has a face value of $1,000 and annual coupon of 8% which is paid semi-annually. It has 15 years remaining to maturity and it currently sells for $1,045. Flotation costs of the new issue of stock are expected to be 5%, and using the pure play method with similar firms the stocks beta is estimated at 1.25. The investment bank believes the stock can sell at $20 per share. The company is expected to pay a dividend of $1.00 next year and it should grow at 7% per year indefinitely. If the tax rate is 40%, what is the weighted average cost of capital?

Answer 1

value of equity =	=1000/0.30 -1000= 3333.33-1000= 2333.33
Equity	= Dividend for next year/ equity share price(1- floating cost ) + growth
	=1/20(1-0.05) +0.07
	=0.05263+0.07
	=0.12263
	=12.26%

Particulars	Cost	tax	After tax cost	Market value	weights= market value / total	after tax cost * weights
Bonds	8%	40%	=0.08*(1-0.4)= 0.048 or 4.8%	1,000.00	0.3	0.048*0.3	0.0144
Equity	12%	40%	12%	2,333.33	0.7	0.12*0.7	0.0858
			total	3,333.33			0.1062

here we have plotted all the given figures, then calculated the after tax rates for debt.

after that the after tax rates are multiplied by the weights and the cumulating that gives us the WACC.

so WACC= 10.62%