Question

In: Finance

Carter & Hill (C&H), a publicly traded company, is planning to raise new capital to fund...

Carter & Hill (C&H), a publicly traded company, is planning to raise new capital to fund an expansion into the Western part of the U.S. To maintain their current capital structure, they need to issue both debt and equity and have hired JP Capital, an investment banking firm, to handle the new issues. C&H figures that:

a. the cost of floating a new bond issue will cost about 2% of the proceeds and a new common stock will cost about 10% of the proceeds.

b. C&H expects to pay $3.00 next year in dividends and grow them at roughly 5% for the foreseeable future.

c. The firm’s tax rate is 40%.

d. C&H plans to issue 20 year bonds with a $1,000 par value and a 9% coupon rate.

e. JP Capital expects to offer C&H’s stock for $30 a share.

What will C&H’s cost of equity and cost of debt (after-tax) be as a result of these new issues? What is its cost of capital for the expansion if its target debt-equity ratio is 1.25?

Solutions

Expert Solution

Par Value of Bond = $1,000

Floatation cost = 2%

Net Proceed from Bond Issue = $1,000 × (1 - 2%)

= $980

Net Proceed from sale of bond is $980.

Coupon Rate = 9%

Year maturity = 20 year

Before tax cost of debt that is YTM of bond is calculated in excel and screen shot provided below:

Before tax cost of debt is 9.22%.

Tax rate = 40%

after tax cost of debt = 9.22% × (1 - 40%)

= 5.53%

After Tax cost of debt is 5.53%.

Cost of equity

Current Share Price = $30

Floatation cost = 10%

Net Proceed from sale of equity = $30 × (1 - 10%)

= $27

Cost of equity = (Expected dividend / Net proceed) + Growth rate

= ($3 / $27) + 5%

= 11.11% + 5%

= 16.11%

Cost of equity is 16.11%.

Debt Equity ratio = 1.25

Weight of debt = 1.25 / ( 1 + 1.25)

= 55.56%

Weight of equity = 44.44%.

Now,

WACC is calculated below:

WACC = (55.56% × 5.53%) + (44.44% × 16.11%)

= 3.07% + 7.16%

= 10.23%

WACC that is cost of capital for company is 10.23%.

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

You are the CFO of a publicly held company and need to raise capital for the...

You are the CFO of a publicly held company and need to raise capital for the firm by issuing some kind of equity. Why would a firm want to issue both preferred stock and common stock rather than just one category of stock? Search an article or the Internet for an academic or industry-related article. Select an article that relates to these concepts in the context of doing business in Saudi Arabia. For your discussion post, your first step is...

Select a publicly traded company and a publicly traded, large partnership. Analyze how they are treated...

Select a publicly traded company and a publicly traded, large partnership. Analyze how they are treated for tax purposes. Describe the differences in taxation of their income, formation, dissolution, and liquidation, as well as the responsibilities borne towards creditors and taxing authorities by partners, shareholders, partnerships, and corporations. As a CPA in public practice, which type of business organization would you advise a client to adopt among sole proprietorships, various forms of partnerships, and various forms of corporations? MAKE A...

Select a publicly traded company that trades on the New York Stock Exchange (NYSE) or on...

Select a publicly traded company that trades on the New York Stock Exchange (NYSE) or on the NASDAQ to analyze. Please note that it is usually easier to find more recent information on larger or well-known companies. The analysis in your essay should answer the following questions: 1. Why did you choose to analyze this company? 2. What were the opinions of some of your referenced articles on this stock as an investment? 3. Please note that it is best...

Barnaby Corp., a publicly traded company, had the following capital structure on January 1, 20X4: Common...

Barnaby Corp., a publicly traded company, had the following capital structure on January 1, 20X4: Common shares — 1,000,000 issued and outstanding $15,000,000 Series A cumulative preference shares with an annual dividend of $2.50 per share — 90,000 issued and outstanding 5,000,000 4% Series B non-cumulative preference shares — 100,000 issued and outstanding 11,250,000 2.3% Series C non-cumulative, convertible preference shares which are convertible into common shares at the rate of two common shares for each preference shares, at the...

Estimate the weighted average cost of capital of a publicly-traded company: Telus. Although you must use...

Estimate the weighted average cost of capital of a publicly-traded company: Telus. Although you must use the most recent stock market data, you should use the 2019 Annual Report for the financial statement information.

Consider the following capital structure for Sea Shore Corporation. The company has a publicly-traded bond issue,...

Consider the following capital structure for Sea Shore Corporation. The company has a publicly-traded bond issue, preferred shares, and common equity in its capital structure. The firm’s tax rate is 35%. The risk-free rate is 7%. Details on the components of the capital structure are listed below. Debt: Fixed coupon-paying bond issue $80 million par 6% semiannual coupon Remaining maturity of 10 years Currently priced in market at 105% of par value Preferred equity: $100 million par 6% annual coupon...

Suppose your company is planning go on public to raise capital for business project. The underwriting...

Suppose your company is planning go on public to raise capital for business project. The underwriting discount is $1.50 and there is a legal fee of $250,000. If the offering price of the share is set at $21.50 per share, how many shares does the company have to issue to raise $80 million? Select one: a. 4 012 500 b. 6 696 429 c. 6 591 337 d. 5 789 452