Assignment 2: The
Cost of Capital
Canyon Drilling, Inc. has just come under new management. One of the first
things the new management wants to accomplish is to identify its capital
structure and the cost of additional funding, if needed.
According to the accounting department, the current balance sheet is accurate
and reflects the financial structure of the company. They have also calculated
the marginal tax rate to be 40%. The company’s beta is currently 1.15.
Your Chief Financial Officer, Marge, has also provided you the following
information about the market and the company’s financials:
Company Specifics |
- Debt: |
3,600 par value ($1,000) bonds outstanding. All have a 7% coupon, and will |
Equity: Common Stock |
The company has 40,000 shares of common stock outstanding, and has a market |
|
Preferred Stock |
The company has 7,500 shares of 5% preferred stock outstanding. All have $100 |
|
Floatation costs: Debt = 4%, Equity = 5% |
|
Market Specifics |
|
Market risk premium = 7% |
Risk free rate = 4% |
|
Required:
Deliverables:
A+++++++++