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In: Finance

Tapley, Inc. can raise up to $5M in new debt at a before-tax cost of 8%....

Tapley, Inc. can raise up to $5M in new debt at a before-tax cost of 8%. If more debt is required, the initial cost will be 8.5%, and if more than $10M of debt is required, the cost will be 9%.

Tapley has $6.6M in retained earnings. The firm has a flotation expense of 10% when it raises up to $2M in the external equity markets, the flotation costs are 15% above $2M to $4M in the external equity markets, and the flotation expense is 20% above $4M for new outside equity.

Tapley has determined that they may raise: $5M at a debt cost of 8%; above $5M to $10M at a debt cost of 8.5%, and; above $10M at a debt cost of 9%

Tapley has a stock price of $88/share, a current dividend of $4/share, and a growth rate of 10%. Additionally, the flotation expenses it faces in the external markets will be tiered based on the volume of stock it sells and they range from a low of 10% to a middle cost of 15% to a high cost of 20%.

BPDebt 1 =$8.33M

BPDebt 2 =$16.67M

BPNew Equity 1 =16.5M

BPNew Equity 2 =$21.5M

BPNew Equity 3 =$26.5M

After-tax Cost of Debt with a before tax cost of debt of 8%=5.6%

After-tax Cost of Debt with a before tax cost of debt of 9%=6.3%

After-tax Cost of Debt with a before tax cost of debt of 10%=7.0%


Cost of Equity for Retained Earnings =15%

Cost of Equity with a 10% flotation expense=15.56%

Cost of Equity with a 15% flotation expense =15.88%

Cost of Equity with a 20% flotation expense =16.25%

With all of the data above, please calculate (Show your Work):

WACC1 =

WACC2 =

WACC3 =

WACC4 =

WACC5 =

WACC6 =

Solutions

Expert Solution

Weighted Average Cost of Capital =WACC
WACC=(Weight of Debt*Cost of Debt)+(Weight of Retained Earnings*Cost of Retained Earnings)+(Weight of Equity* Cost of Equity)
Md Mr Me M=Md+Mr+Me Wd=Md/M Wr=Mr/M We=Me/M
($ million)
Total Debt Retained Earnings Equity Total Capital Weight of Debt Weight of Retained Earnings Weight of Equity
WACC1 $8.33 $6.60 $16.50 $31.43 0.26503341 0.2099905 0.5249761
WACC2 $8.33 $6.60 $21.50 $36.43 0.2286577 0.1811694 0.5901729
WACC3 $8.33 $6.60 $26.50 $41.43 0.20106203 0.1593049 0.6396331
WACC4 $16.67 $6.60 $16.50 $39.77 0.41916017 0.1659542 0.4148856
WACC5 $16.67 $6.60 $21.50 $44.77 0.37234755 0.1474201 0.4802323
WACC6 $16.67 $6.60 $26.50 $49.77 0.33494073 0.13261 0.5324493
Assume Tax Rate =T
8*(1-T)=5.6
T=(8-5.6)/8= 0.3
Tax Rate =0.3=30%
Aftert tax cost if before tax cost is 8.5%= 5.95% 8.5*(1-0.3)
WACC1
Weight Cost Weight*Cost
Debt 0.2650334 5.95% 1.58%
Retained Earnings 0.2099905 15% 3.15%
Equity 0.5249761 16.25% 8.53%
SUM 13.26%
WACC1=SUM= 13.26%
WACC2
Weight Cost Weight*Cost
Debt 0.2286577 5.95% 1.36%
Retained Earnings 0.1811694 15% 2.72%
Equity 0.5901729 16.25% 9.59%
SUM 13.67%
WACC2=SUM= 13.67%
WACC3
Weight Cost Weight*Cost
Debt 0.201062 5.95% 1.20%
jeff jeffy answered 1 year ago
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