The company is preparing to make investments and wants to determine the discount rate, or cost of capital, at which to value these investments.
You are given the following for Cardinal & Cardinal, Inc. Their tax rate is 34%. The firm is in need of $5 million dollars in external funds. Your bond advisor suggests that new bond issues can be lower than the current yield to maturity by 1.5%.
Existing capital structure:
C&C Debt: 4,000 Eight percent (8%) coupon bonds outstanding. The par value is $1000 and they mature in ten years. They are currently selling for $1010 and make semiannual payments.
C&C Equity: 50,000 shares outstanding. The common stock is currently selling for $62 per share. The beta for the company is 1.10.
C&C Preferred Stock: 9,000 shares of 4% preferred stock with a par value of $100, and is currently selling for $60 per share.
Market Information: The risk of the market is 8% and the risk-free rate is 3%. The industry debt-equity ratio is 33%. The flotation rate for debt is 3% and for equity it is 4%.
Calculate the existing weighted average cost of capital. Calculate the new cost of capital when the $5M in new funds is added. Show your calculations of the capital structure, assess the capital structure, compare recommend the new funding choice impacts on capital structure, and determine the firm’s new weighted average cost of capital in a executive summary of 3 to 5 pages.
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