Question

Nealon Energy Corporation engages in the acquisition, exploration, development, and production of natural gas and oil in the continental United States. The company has grown rapidly over the last 5 years as it has expanded into horizontal drilling techniques for the development of the massive deposits of both gas and oil in shale formations. The company's operations in the Haynesville shale (located in northwest Louisiana) have been so significant that it needs to construct a natural gas gathering and processing center near Bossier City, Louisiana, at an estimated cost of $60 million. To finance the new facility, Nealon has $10 million in profits that it will use to finance a portion of the expansion and plans to sell a bond issue to raise the remaining $50 million. The decision to use so much debt financing for the project was largely due to the argument by company CEO Douglas Nealon Sr. that debt financing is relatively cheap relative to common stock (which the firm has used in the past). Company CFO Doug Nealon Jr. (son of the company founder) did not object to the decision to use all debt but pondered the issue of what cost of capital to use for the expansion project. There was no doubt that the out-of-pocket cost of financing was equal to the new interest that must be paid on the debt. However, the CFO also knew that by using debt for this project the firm would eventually have to use equity in the future if it wanted to maintain the balance of debt and equity it had in its capital structure and not become overly dependent on borrowed funds.

Answer 1

AS PER CHEGG RULES,WE HAVE TO ANSWER ONLY FIRST FOUR PARTS OF THE QUESTION, HENCE I ANSWERED ONLY PART a,b,c,d.

No of yeads CNPER)= 14. fulure value (pas) = $1000 Coupon rate : 9% = 1000 ray (08) PMT = $90 present value a srodno Rate : 8.50% co Kcalculation refer ercel screen shot) . Formula for rate in Excel is E RATeraper, PMT, - PV, FV) Po Flotation costs = $25 per band Rate : & 80 new price feu) = $ 1040 -$25 (for calculation de fer excel a $1015 Screen Shot using same formula mentioned above) Affer for cast of debt(ka): 8.81%. (1-1) s 8817. ( 0.35) 5. 7265 - 5.73% (Rounded off) we know that Bot Di Kengo Keio Ig Poice of share : $28. Cast of issue a $2.50 9:67 New poire → $25.50 ee] Re 3.00 (1+6%) +64 25.50 Me = 3.0 (1.06) + 6% od Ke = 3:13_26%. 25.5 25.5 0.124705 70.06 - 18.47058 18.47% (Rounded off) WARE Wd Kd two ke delt weight X rest of debt t Equity weight x cost of equity Total valve : Go million debt : $50 million Equity: $10 million debt weight : 50_ cou'ry weight: 60 WAS 60 50 x 5.73 % f to x 18.47% = 4,75% + 3.078333 3 7.85333 7.85 % Rounded off)

fx =RATE( C4, C5 , C6 , C7) v A B C E F 14 Nper Pmt Pv 90 -1040 1000 Fv Rate Q 8.500 Rate í 8.500 11

fx =RATE( C4 , C5 , C6 , C7) A B C D E v F 14 Nper Pmt PV 90 -1015 1000 FV Rate Rate Q 8.810 8.810