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Weighted Average Cost
Complete the Mini Case on page 368 and submit to instructor. In parts "a" and "b" clearly label the calculation of the required ratios and solve using Excel. Use formulas to calculate the ratios and format the cells to insert a comma if there is more than three numbers. Round to two decimal places No narrative analysis is called for, so clearly label the calculations so that management will be able to comprehend them.
Complete the Mini Case on page 368 and submit to instructor. In parts "a" and "b" clearly label the calculation of the required ratios and solve using Excel. Use formulas to calculate the ratios and format the cells to insert a comma if there is more than three numbers. Round to two decimal places no narrative analysis is called for, so clearly label the calculations so that management will be able to comprehend them.
a. Market prices are $1,035 for bonds, $19 for preferred stock, and $35 for common stock. There will be sufficient internal common equity funding (i.e. retained earnings) available such that the firm does not plan to issue new common stock. Calculate the firm’s weighted average cost of capital.
B. In part a we assumed that Nealon would have sufficient retained earnings such that it would not need to sell additional common stock to finance its new investments. Consider the situation now, when Nealon’s retained earnings anticipated for the coming year are expected to fall short of the equity requirement of 47% of new capital raised. Consequently, the firm foresees the possibility that new common shares will have to be issued. To facilitate the sale of shares, Nealon’s investment banker has advised management that they should expect a price discount of approximately 7% percent, or $2.45 per share. Under these terms, the new shares should provide net proceeds of about $32.55. What is Nealon’s cost of equity capital when new shares are sold, what is the weighted average cost of the added funds involved in the issuance of new shares?
MINI CASE
DATA
Flotation costs:
Bond 15%
P/S 2.01
Div for C/S 2.50
Div for P/S 1.50
growth 6%
Bond
Coupon 8%
Par Value 1,000.00
Years 16
tax rate 34%
Mrkt prices
Bonds 1,035.00
P/S 19.00
C/S 35.00
A.
% of Mix
Bonds 38%
P/S 15%
C/S 47%
Bond's Cost of Capital
Net Price =
Cost of Capital =
After-tax COC =
Preferred Stock's Cost of Capital
Net Price =
Cost of Capital =
Internal Common Stock's Cost of Capital
Market Price =
Cost of Capital =
Weighted Cost of Capital Using Internal Funds
Debt =
P/S =
C/S =
B.
External Common Stock's Cost of Capital
Net Price = 32.55
Cost of Capital =
Weighted Cost of Capital Using External Funds
Debt =
P/S =
C/S =
Reference
Keown, A., Martin, J., & Petty, J. (2008) Foundations of finance (6th ed.). New York, New York: Prentice Hall. ISBN: 9780132339223
Solution Description

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