Question

Question 5. Answer the following problem based on the Corporate Financial Analysis textbook. Your answer should be formatted similarly to Figure 9-12 on page 307 of that textbook. (25 pts)

      The Schroder Corporation must raise $3 million to finance the construction of a new facility. It plans to do this by increasing the number of shares of preferred and common stock and by issuing 10-year corporate bonds with a face value of $1000 and annual payments at a coupon rate of 9.0%.

      The corporation’s long-term debt currently amounts to 3,300 corporate bonds with a current market value of $902.50/bond. The corporation has 10,000 shares of preferred stock outstanding with a market value of $10.50/share. The corporation also has 250,000 outstanding shares of common stock with a current market value of $24.25/share.

      Holders of preferred stock receive annual dividends of $1/share, and holders of common stock receive annual dividends of $1.75/share. The annual growth rate of common stock is 5%.

      Flotation costs are 1% for bonds, 2% for preferred stock, and 5% for common stock.

      Schroder’s tax rate is 38%.

      Assuming that the corporation’s capital structure will remain the same as that currently, what will be the after-tax weighted average cost of capital (WACC) for the new facility based on the market values of the components of its capital structure? Include flotation costs in your calculation.

Answer 1

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