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(15) Crow Corporation is planning a $200 million expansion to be financed with debt, preferred stock,...

  1. (15) Crow Corporation is planning a $200 million expansion to be financed with debt, preferred stock, and common stock. Their target capital structure includes 20% debt and 5% preferred stock. They will raise the rest of the funds by retained earnings. The tax rate is 25%.

Bonds: Crow Corporation has bonds with 6 years to maturity and a face value of $1000. The coupon rate is 7.8% and coupons are paid semiannually. The bonds trade at $990 per bond. The (before-tax) cost on any new debt will be the same as the yield to maturity on the current bonds.

                                                                                                                                

Preferred Stock: Crow issues preferred stock with a $2.85 dividend per year. They are sold to the market at $27 per share, but issue costs are $2 per share.

Retained Earnings: Crow has a just paid a dividend of $2.40. The retention rate is 40% and return on equity (ROE) is 20%. The price of the common stock is $36 per share.  

  1. Calculate the weighted average cost of capital (WACC).
  2. The expansion is expected to produce cash flows of $48,000,000 every year for the next 6 years. Use the WACC to find the net present value (NPV).   Should they expand? Explain.

Solutions

Expert Solution

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

PV FACTOR = 1/(1+r)^n

I HAVE TAKEN WACC = 13.17% FOR CALCULATING NPV, ROUNDED TO 2 DECIMAL WACC FIGURE

NEED TO TAKE FULL FIGURE OF WACC, PLEASE LET ME KNOW, NOTHING WAS MENTIONED, SO TOOK 2 DIGITS

jeff jeffy answered 2 years ago
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