Is the decision to raise approximately $20 million to finance the new division exclusively using new...

Is the decision to raise approximately $20 million to finance the new division exclusively using new equity likely to affect HK’s WACC? Explain why or why not in terms of financial leverage, component costs, and capital structure. What is the likely impact? (Note: A recalculation of the WACC is not required for this question.)

Solutions

Expert Solution

Yes it will be likely to affect the weighted average cost of capital of the company because when there will be a raising of equity capital then the overall amount of debt capital in the entire debt ratio and leverage ratio will be going down and it will also mean that the company will be having an additional dissolution of its stake in the market.

It will be leading to increase in the cost of equity in the overall cost of capital as the the weight of equity will be going up and it will also mean that weight of debt capital will be going down.

Weighted average cost of capital will be likely to be impacted because it is generally known that the cost of equity will be higher than the cost of debt and it can lead to an overall increase in the cost of debt, but it will provide optimum flexibility and liquidity to the company in order to not have higher amount of debt on its overall books of accounts.

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

A company decides to raise $30 million in order to finance a new division within the...

A company decides to raise $30 million in order to finance a new division within the company. They will exclusively use new equity to finance this new division. What will be the likely impact of this decision on the company's WACC? Explain why or why not and use financial leverage, component costs and capital structure in your answer.

The Scandrick Corporation needs to raise $65 million to finance its expansion into new markets. The...

The Scandrick Corporation needs to raise $65 million to finance its expansion into new markets. The company will sell new shares of equity via a general cash offering to raise the needed funds. If the the offer price is $35 per share and the company’s underwriters charge a spread of 7 percent, how many shares need to be sold?

The Severn Company plans to raise a net amount of $270 million to finance new equipment...

The Severn Company plans to raise a net amount of $270 million to finance new equipment in early 2017. Two alternatives are being considered: Common stock may be sold to net $60 per share, or bonds yielding 10% may be issued. The balance sheet and income statement of the Severn Company prior to financing are as follows: The Severn Company: Balance Sheet as of December 31, 2016 (Millions of Dollars) Current assets $ 900.00 Notes payable $ 255.00 Net fixed...

The Severn Company plans to raise a net amount of $270 million to finance new equipment...

Your company plans to raise $100 million to finance its new two-year project by issuing new...

Your company plans to raise $100 million to finance its new two-year project by issuing new two-year bonds (with annual coupons and annual compounding). Your company and its new project are currently considered risk-free. Unfortunately, covenants in the preexisting debt issued during harder times impose restrictions on the amount of new debt. Specifically, if the face value of the new bond issue is below $100 million, your company can promise to pay an annual coupon of up to 5%. However,...

The Clifford Corporation has announced a rights offer to raise $20 million for a new journal,...

The Clifford Corporation has announced a rights offer to raise $20 million for a new journal, the Journal of Financial Excess. This journal will review potential articles after the author pays a nonrefundable reviewing fee of $4,000 per page. The stock currently sells for $40 per share, and there are 1.5 million shares outstanding. a. What is the maximum possible subscription price? What is the minimum? (Leave no cells blank - be certain to enter "0" wherever required.) b. If...

Your company needs to raise $46 million to finance a new factory. You’re evaluating two different...

Your company needs to raise $46 million to finance a new factory. You’re evaluating two different 25-year bonds to raise these funds: a coupon bond with an annual coupon rate of 7 percent; and a zero coupon bond. Your company’s tax rate is 30 percent. Both bonds will have a par value of $1,000, and a required annual return of 7 percent with semi-annual compounding. a-1. How many of the coupon bonds would you need to issue to raise the $46...

Your company needs to raise $44 million to finance a new factory. You’re evaluating two different...

Your company needs to raise $44 million to finance a new factory. You’re evaluating two different 20-year bonds to raise these funds: a coupon bond with an annual coupon rate of 8 percent; and a zero coupon bond. Your company’s tax rate is 40 percent. Both bonds will have a par value of $1,000 and a required annual return of 8 percent with semi-annual compounding. a-1. How many of the coupon bonds would you need to issue to raise the $44...

A company has decided to sell $50 million in new 20-year bonds to finance new construction...

A company has decided to sell $50 million in new 20-year bonds to finance new construction projects. The company is also considering whether to issue coupon bearing bonds or zero coupon bonds both with the same face value of $1,000. The YTM on either bond issue will be 7.5%. The coupon bond would have a 7.5% coupon rate and the bond makes semiannual payments. (1) How many of the coupon bonds must the company issue to raise the $50 million?...

Mahomes Company needs to raise $275 million to start a new project and will raise the...

Mahomes Company needs to raise $275 million to start a new project and will raise the money by selling new bonds. The company will generate no internal equity for the foreseeable future. The company has a target capital structure of 55 percent common stock, 10 percent preferred stock, and 35 percent debt. Flotation costs for issuing new common stock are 6 percent, for new preferred stock, 4 percent, and for new debt, 2 percent. What is the true initial cost...

Subjects