Question

What If Tesla has 100,000 bonds outstanding that are selling at par value. Assume that the bonds yield 9.6 percent. Assume that Tesla also has 4.1 million shares of common stock outstanding. The stock has a beta of 1.3 and sells for $60 a share. The U.S. Treasury bill is ylelding 6 percent and the market risk premium is 9 percent. Tesla's tax rate is 35 percent. What is Tesla's weighted average cost of capital? 14.39 percent 12.58 percent 7.20 percent 10.78 percent 15.90 percent 6. Red Shoe Co has concluded that additional equity financing will be needed to expand operations and that the needed funds will be best obtained through a rights offering. It has correctly determined that as a result of the rights offering, the share price will fall from $140 to $105 ($140 is the rights-on price: $105 is the ex- rights price, also known as the when-issued price). The company is seeking $20 million In additional funds with a per-share subscription price equal to S70. How many shares are there currently, before the offering? (Assume that the increment to the market value of the equity equals the gross proceeds from the offering.) 300,000 274,286 297,143 285,714 0 291,429

Answer 1

Cost of Equity as per CAPM = Risk free rate + beta*Market risk premium

= 6% + 1.3*9%

= 17.7%

WACC = After tax cost of debt*Weight of debt + Cost of Equity*Weight of Equity

= 9.6%*(1-35%)*100,000*1000/(100,000*1000+4,100,000*60) + 17.7%*246,000,000/346,000,000

= 14.39%

i.e. 14.39 percent

Let number of shares before offering be x

Number of shares issued in rights offering = Funds required/Subscription price

= 20,000,000/70

= 285714.29

i.e. 285714 shares

Ex-rights price = (Price before rights*Shares before right + proceeds from rights issue)/(Shares after right)

105 = (140*x + 20,000,000)/(x+285714)

105 x + 29,999,70 = 140x + 20,000,000

x = 285,713.43

i.e. 285,714 shares approx.