I. The company Kopan just issued a corporate bond that is selling at 97% of its

Question

I. The company Kopan just issued a corporate bond that is selling at 97% of its par value. The floatation cost is 5% of par value. The coupe rate is 8%, and it matures in 2030, The corporate tax rate is 35%. What is Kopan's real cost of debt? Kopan also has issued 20 million new shares of common stocks. The stock is selling at 40 dollars per share currently. The underwriter Kopan worked with charge 5% flotation cost for issuing the new stocks. Kopan just paid 2 dollar dividend this year. And its dividend is expected to grow at 3% annually. What is Kopan's actual cost of equity for these new issues? 2. opan acquired 40% of its new capital via corporate bond as stated in No.1, and the rest of its new capital via new issues of common stocks stated in No.2. What is the WACC of Kopan company for its newly acquired capital? 3. If

Explanation / Answer

2.

Issue price = $40

Floatation cost = 5%

New proceed = $40 × (1 - 5%)

= $38.

Cost of equity = [Current Dividend × (1 + growth rate) / Net proced] + Growth rate

= [$2 × (1 + 3%) / $38] + 3%

= 5.42% + 3%

= 8.42%

Cost of equity is 8.42%.

3.

After tax Cost of debt = 5.84%

Weight of debt = 40%

Weight of equity = 60%

Cost of equity = 8.42%

WACC = (40% × 5.84%) + (60% × 8.42%)

= 2.34% + 5.05%

= 7.39%

WACC of company is 7.39%.

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