Question

ill 51% 3:18 Tutorial 2 - Read-only Sign in to edit and save changes to this file. 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 earnings 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

a)
Common stock			Preferred stock				Long term debt
MPS =	$                                15		Net proceeds of 10% stock	$                    98	net of issue costs		Interest rate	12%
Expected dividend=	$                            0.50		Face value	$                  100			Net issue proceeds	$                             965
Growth rate=	8%						Face value	$                          1,000
			Dividend	$                    10	100*10%
Retained earnings=	$                      500,000		Net proceeds	$                    98			Tax rate	30%
New MPS=	$                          14.50
Flotation costs=	$                            0.30		Cost of preference share=	Dividend/Net proceeds*100			Interest=	$                             120	1000*12%
							Net issue proceeds	$                             965
MPS-Flotation costs	$                          14.70		Cost of preference share=	10.20%
Expected dividend=	$                            0.50						Cost of debt=	Interest/Net issue proceeds*100*(100-tax rate)
Growth rate=	8%
							Cost of debt=	8.70%
Cost of equity=	(Expected Dividend/MPS-Flotation costs)+Growth rate
Cost of equity=	11.40%
b)		Weight	WACC
Cost of equity=	11.40%	55%	6.27%
Cost of preference share=	10.20%	15%	1.53%
Cost of debt=	8.70%	30%	2.61%
		WACC	10.41%
c)
Cost of equity=	11.40%	35%	3.99%
Cost of preference share=	10.20%	15%	1.53%
Cost of debt=	8.70%	50%	4.35%

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