This is page two of a two part question on Capital Budgeting, which was previous

Question

This is page two of a two part question on Capital Budgeting, which was previously submitted question from a few minutes ago. This section is calculationg WACC and/or variable growth model.

The following is the dollars. The current capital structure is to be maintained All amounts are in millions of e current balance sheet for Belich Company. $10 10 Cash Accounts receivable Inventories Current assets Gross fixed assets Accum deprec Net fixed assets $10 20 Accounts payable Accruals Short-term debt 20 50 100 25 Current liabilities Long-term debt (bonds) 30 Preferred stock Common stock Paid-in capital Retained earnings 50 50 30 100 Total Assets 100 Total liab and equity The following information has been gathered regarding Bellich Company's capital. I. The firm has outstanding an issue of 8%, semiannual coupon, noncallable bonds with 12 years to maturity. New bonds with these characteristics could be sold for a price of S975.00. The bonds will have a par value of $1,000. Flotation costs on new bonds are expected to be 7.5%. The current price of the firm's perpetual preferred stock (10% annual dividend on $100 par value, dividends paid quarterly) is $125.50. New perpetual preferred stock could be sold to the public at this price, but Bellich would incur flotation costs of $5.50 per share. 3. The firm's common stock is currently selling at $96 per share. The last dividend paid was Do $4.00. Dividends are paid semiannually and investors expect the dividend to grow at a constant 7% annual rate into the foreseeable future. Any new common stock issued would involve flotation costs of 12%.

Explanation / Answer

Cost of debt can be calculated using I/Y function

N = 12 x 2 = 24, PMT = 8%/2 x 1000 = 40, PV = -975 x (1 - 7.5%) = -901.875, FV = 1000

=> Compute I/Y = 4.69% (semi-annual)

Before-tax cost of debt, kd = 2 x 4.69% = 9.38%

Cost of preferred stock, kps = Dividend / (Price - Flotation) = 10 / (125.5 - 5.5) = 8.33%

Cost of equity, ke = D0 x (1 + g) / (P x (1 - g)) + g = 4 x (1 + 7%) / (96 x (1 - 12%)) + 7% = 12.07%

WACC = wd x kd x (1 - tax) + wps x kps + we x ke

Here, w - weight , k - cost, d - debt, ps - preferred stock, e - equity

We use weight for market values of debt, preferred stock and equity, which is not mentioned. Also, the tax rate is not mentioned. I don't have the first page, if you have this information on that you can calculate WACC based on the cost of each component I calculated.

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