Bus401 Mini Case Chapter 9

Percentage of future financial backing Type of financing bail bonds (8%, $1,000 par, 16- year maturity38% Preferred stock (5,000 sh bes outstanding $50 par, $1. 50 dividend15% Common justice47% Total100% A. Market prices are $1,035 for bonds, $19 for preferred stock, and $35 for commons stock. There will be sufficient internal common equity funding (i. e. , retained earnings) available much(prenominal) that the firm does not plan to issue bran-new common stock. Calculate the firms weighted comely cost of capital. BondsPreferred stockCommon Stock 1035-15% (155. 25) = 879. 75 1. 50/(19-2. 01) 16. 99 = 8. 83% 2. 65/35 + . 06 = 13. 57% 9. 9% 9. 49% (1-. 34) = 6. 26% WeightsAfter tax income captialProduct Bond 0. 38X6. 26%=2. 3788 Preferred Stock0. 15X8. 83%=1. 3245 Common Stock0. 47X13. 57%=6. 3779 10. 08% B. In dissociate a we assumed that Nealon would have sufficient retained earnings such that it would not need to sell additional common stock to finance its new investment fund ss. Consider the situation now when Nealons retained earnings pass judgment for the coming year are expected to fall short of the equity requirement of 47% of new capital raised. Consequently, the firm foresees the possibility that new common shares will have to be issued.To facilitate the sale of shares, Nealons investment banker has advised management that they should expect a price discount of nigh 7%, or $2. 45 per share. Under these terms, the new shares should provide crystallise proceeds of about $32. 55. What is Nealons cost of equity capital when new shares are sold, and what is the weighted average cost of the added funds involved in the outlet of new shares? Common Stock 2. 65/32. 55 + . 06 = 14. 14% WeightsAfter tax captialProduct Bond 0. 38X6. 26%=2. 3788 Preferred Stock0. 15X8. 83%=1. 3245 Common Stock0. 47X14. 14%=6. 6458 10. 35%