Why do companies need money? - TMC Business



BUA321 Chapter 9 Class notes Cost of capital Why do companies need money?ExpansionShould they borrow to operate the business?Describe the differences between the capital structure and the financial structure.Financial Structure is all the right sideCapital structure is LTWhat are the four sources of long-term capital?BondsPreferred StockEquity Common Stock Retained earningsWhat is business risk? What is financial risk?Risk of the business and industry Chosen when you choose the businessRisk of borrowing Chosen as you do the businessWhat does flotation cost mean for financing?A company has the following capital structure: use WACC to calculateDebt30,000 bonds selling at par.Preferred Stock300,000 shares at $mon Equity500,000 shares at $87A company is contemplating issuing 30-year, 6% coupon bonds with a par value of $1,000. Suppose further that the firm must sell the bonds to the public at $970. Flotation costs are 3% or $30. The corporate tax bracket is 40%. What is the cost of debt?389890000A corporation is issuing preferred stock. The dividend will be fixed at $7.50 and sell at a price of $85. Flotation costs are $4.00. What is the cost of Preferred Stock?39052513462000The corporation must raise equity. The company recently paid 4.75 in dividends. Historically dividends have grown at 8%. The company anticipates that this will continue. The most recent price for the stock has been $87. Flotation costs have been $2, but the company anticipates an additional $2 in underpricing. The risk free return is 3.75; beta is 1.25; and the stock market average is 11%. What is average cost of retained earnings? The cost of new Common Stock? center679450014287522352000The company has determined that they can borrow up to $40 million before the cost of debt would increase to 7.5% before taxes. The company forecasts that next year they will have approximately $20 million in retained earnings. Determine the marginal costs of capital for the firm.66675013716000Small business financing Research (25 points) _______ Offline Homework (33 points) ______BUA321 Chapter 9 research 25 pointsUsing your company what is the market value capital structure? Use the book value of debt as the market value.From the stock valuation chapter, what is the dividend and SML cost of retained earnings?Assume a $5 flotation cost for new equity. What is the cost of new equity?Predict a 5% increase in revenues next year. Given this forecast, what is your predicted retained earnings next year? Use this for the break point of equity costs.What is the WMCC for the firm?BUA321 Exercise 33 pointsComplete the following table for costs of financing with the use of debt. The current corporate tax rate is 40%. (6 points) (use WACC spreadsheet, complete the questions below as parts, do part A for the following problems and then answer question #4, then repeat for B & C)BondCouponMaturityPriceFlotation costsBefore tax Cost of debtAfter tax cost of debtA10151050209.61%5.77%B4201000304.232.54C730975157.454.47Complete the following table for costs of financing with the use of preferred stock. The current corporate tax rate is 40%. (6 points)Preferred stockDividendPriceFlotation costsBefore tax Cost of preferredAfter tax cost of preferredA$3$97$33.193.19B$4.75$75.75$2.506.486.48C$7$59$1.7512.2312.23Complete the following table for costs of financing with the use of common equity. The current corporate tax rate is 40%. (9 points)StockDividendPriceGrowth rate of dividendsFlotation costsBefore tax Cost of retained earningsBefore tax cost of new common stockAfter tax cost of new common stockA$1.75$604%$27.037.147.14B$2.95$806%$1.759.919.969.96C$3.85$253.75%$119.7320.3920.39Using the securities above calculate the WACC for the following pany A finances its cash needs with 30% debt, 40% preferred stock, and 30% equity.WACC with RE 5.12%WACC with new common stock 5.15%Company B finances its cash needs with 60% debt, 10% preferred stock, and 30% equity.WACC with RE 5.14%WACC with new common stock 5.16Company C finances its cash needs with 20% debt, 5% preferred stock, and 75% equity.WACC with RE16.29%WACC with new common stock16.79%Complete the following comprehensive cost of capital problem.Debt – The company is issuing 150,000 AAA rated bonds for $975. The bonds have a 30 year maturity and a 6.75% coupon. The flotation costs for debt average around $10. The company’s corporate tax rate is 40%. If the company were to need $200,000,000 of debt the after-tax cost of financing would increase 2%.Preferred stock will be issued with a 5.25% dividend and a stock price of $85. The company is considering issuing 600,000 shares. The flotation costs are estimated to be $2. There is no additional increase in costs if the firm decides to issue more preferred.New common stock will be issued with a projected dividend of $3.75. The current stock price is $120. The company’s earnings and dividends have been growing at 6%. The company is estimating that 2,000,000 shares will be issued with a $1 underpricing cost and a $2 underwriting fee. Retained earnings are expected to be $500,000,000What is the after-tax cost of debt? 4.22%What is the after-tax cost of preferred? 6.33%What is the cost of retained earnings? 9.31%What is the cost of new common equity? 9.40%What is the capital structure of the financing? (what are the proportions?)33.45% Debt11.66 preferred54.89% EquityWhat is the break point of debt? $597,948,718What is the breakpoint of equity? $910,937,500Calculate the WMCC at the breakpoints: 7.26 / 7.93 / 7.98 ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download