The Argos Corp is planning to raise $20 million in capital to finance the expans
ID: 2740344 • Letter: T
Question
The Argos Corp is planning to raise $20 million in capital to finance the expansion of their manufacturing plant. The break-up is as follows: 6 million in debt, 4 million in preferred stock and 10 million in common stock.
a. They plan to issue 10 years bonds, paying 10% coupon annually, and expect to receive $1031.40 per $1000 face value. Ignore floatation costs.
b. They plan to issue perpetual preferred stocks and expect to receive $73.62 per face value of $100 paying 12% preferred dividends. Ignore floatation costs.
c. The plan to issue common stock and expect to pay $2.40 in dividends next year (d1) with a forecasted growth rate of 7%. The current market price of the stock is $18.36.
What is the weighted average cost of capital (WACC) if the marginal tax rate is 30%?
Following up on Question 1, assume the NPV of a manufacturing plant expansion has been estimated at $500,000 using WACC estimated in Question 1. However, the analysis was performed without taking into consideration floatation costs. The floatation costs for issuing debt, preferred stock and common stock are 5%, 3% and 7%, respectively. Should the projected be accepted if floatation costs are added to the $20 million? Why or why not?
The question above this is question 1
Explanation / Answer
Cost of debt
Applying excel formula
=RATE(10,-100,1031.4,-1000,0,0)= 9.50%
After tax cost of debt =9.5%*(1-.35)= 6.179%
Cost of prefernce shares =12/73.62 = 16.29%
Cost of equity r= 2.4/18.36 +7% =20.07%
WACC = 6/20*6.18% + 4/20*16.29% +10/20*20.07% =15.14%
Affect of floation cost
Debt floation cost =5% of 6 million
Prefernce shares = 3% of 4 million
Equity =10% of 10 million
the total would come to $1.42 million As NPV is 0.5 Million projected shpuld be rejected cost of floation is greater than npv itself
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.