1. How does a company raise money (capital) for their projects? 1) Common Shares

Question

1. How does a company raise money (capital) for their projects?
1) Common Shares.
2) Preferred Stock.
3) Bounds/Debentures.

2. KOOKIS, Inc., has 3M shares of common stock, $20 per share. What is the market value of common equity?
Common Stock = 3,000,000 x $20 = 60,000,000
Hence, the common stock is $20,000,000.

3. The company has 1M shares of preferred stock, $10 per share. What is the market value of preferred equity?
Preferred stock = 1,000,000 x $10 = $10,000,000

4. A company has 30K units of bond with a par value of $1,000 per unit. The bond is selling at 100% of par value. What is the market value of debt?
Market value of bound = 30,000 x 1,000 = 30,000,000.
Hence, the market value of bounds is $30,000,000.

5. What is the total capital the company raised?
Total capital raised = common stock issued ($20,000,000) + preferred stock issued ($10,000,000) + Bounds issued ($30,000,000).
Total capital raised = $60,000,000
Hence, the total capital raised is $60,000,000.

6. What is a company

Explanation / Answer

6. That Bar is Showing Total Capital Structure of the Firm.

Firm has Total Value of $100 million

Out of this, $60 million or 60% is part of Equity, 10% is of Preferred Stock, and 30% is of Debt.

8. Cost of Preferred Stock is : 1 / 10 = 10%

11. After Tax Cost of Equity = 15% in the Blue Portion of the Bar

Cost of Preferred Stock : 10% in the Orange Bar

After Tax Cost of Debt = 2% in the Grey Bar

12. Weighted Average Cost of Capital:

(.60 x 15) + (.10 x 10) + (.30 x 2) = 10.60%

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