Part 1 A Bremond Equipment Supply Corporation (BESC) needs to determine its Weig
ID: 2784590 • Letter: P
Question
Part 1 A Bremond Equipment Supply Corporation (BESC) needs to determine its Weighted Average Cost of Capital in order to make a few capital budgeting decisions. The firm has already established the proportion of its capital. Use these proportions in calculating the firm's WAAC Target Capital Structure Proportions 69% 5% 26% Source of Capital Long-term debt Preferred stoc Common stock equity Debt: BESC can sell a 17-year, semi-annual $1,000 par value, 8.75 percent bond for $985 A flotation cost of 1.75 percent of the face value would be required in addition to the discount of $15 Preterred Stock: BESC has determined t can issue preterred stock at $70 per share par value The stock vwil pay an $8 00 annual dividend The Common Stock: BESC's common stock is currently selling for $39 per share. The dividend expected to be paid at the end of the coming year is $5 35 Its dividend payments have been growing at a constant rate for the last five years Five years ago, the dividend was $3.00 It is expected that to sel, a new common stock issue must be underpriced at $4 per share and the firm nust pay $1 per share in fsotation costs Additionally the tirm's marginai tax rate is 40 percent To heip determine the firm's WACC, we will break this problem down into steps 1 Calculate the rate for the new bond issue. notice is has semi-annual compounding 2 Calculate the after-tax cost of the bond issue oe 49 PM 11/11/2017
Explanation / Answer
a) Face value FV $1,000 Coupon Payment = 8.75%/2 x $1000 $43.75 Period = 17 x 2 34 Present Value = $985 x ($1000 x 1.75%) $967.5 Cost of debt before tax = Rate(34,43.75,-967.5,1000) 4.57% Annual cost of debt = 2 x 4.57% 9.13% b) After tax cost of debt = 9.13% x (1-40%) 5.48% c) Cost of Preferred = Annual Dividend / Par value - Issue cost Cost of Preferred = $8/($70 - $2) 11.76% d) CAGR =[( Beg. Value/Ending Val)^(1/# of years)]-1 CAGR = (($5.35/$3)^(1/6)) -1 10.12% Growth Rate 10.12% e) Cost Of equity = D1/ Po - Floatation Cost + growth rate D1 $5.35 Current Price = $39 - $4 $35 Floatation cost $1 Growth 10.12% Cost Of equity = $5.35/($35 - $1) + 10.12% 25.86% WACC Source of Capital Proportions Cost WACC Long-term debt 69.00% 5.48% 3.78% Preferred stock 5.00% 11.76% 0.59% Common stock equity 26.00% 25.86% 6.72% Total 11.09% WACC 11.09%