1. Hurricane productions wants to arrange for $50 million in capital to finance
ID: 2787690 • Letter: 1
Question
1. Hurricane productions wants to arrange for $50 million in capital to finance the building of a new facility to house the motion picture studios. The current plan is 60% equity capital and 40% debt financing. The equity capital which is a total of $35 million (60% of total) will have stock sales for 40% of this amount and it will pay dividends of 5% per year, and the remaining 60% from retained earnings, which currently earns 9% per year. The Debt Capital (40% of the total) of $15 million, will be obtained from 2 sources: $10 million borrowed at 8% and the remainder in convertible debt bonds at an estimated 10% per year bond dividend rate. What is the WACC for this scenario?Explanation / Answer
Total Equity Capital $35 million Through stock sales $14 million (40% of $35 million) Dividend(Cost) for stocks 5% Retained earning $21 million (35-14) Cost of capital of retained earning 9% Total Debt captal $15 million Borrowed at 8% $10 million Cost of borrowed capital of $10 million 8% Convertible debt bonds $5 million (15-10) Bond dividend rate 10% 14 Weight of stocks costing 5%=(14/50) 0.28 (14/50) 21 Weight of retained earning costing 9% 0.42 (21/50) 10 Weight of borrowed capital costing 8% 0.2 (10/50) 5 Weight of convertible bond costing 10% 0.1 (5/50) Weighted Average Cost of Capital(WACC)=0.28*5+0.42*9+0.2*8+0.1*10= 7.78 WACC 7.78%
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