The Buccaneer Company was recently formed to manufacture a new product. It has u

Question

The Buccaneer Company was recently formed to manufacture a new product. It has u capital structure: 9% Debentures of2002 ($1000 Par) 7% Preferred stock ($100 Par) Common stock (320,000 shs.) $6,000,000 2,000,000 12.000,000 $20,000,000 Total e company's published beta coefficient is 1.5. The return on the market portfoli k fee rate is .03. Assume a marginal tax rate of40%. A. Compute the weighted-average cost of capital. The Financial Analysts at the Buccaneer Company think they can low by issuing $4,000,000 in new 8%, 20 year, $1000 par, mortgage bond buying back $4,000,000 in common stock, thus making their new deb The new bonds would incur 10% in various flotation costs. Compu average cost of capital.

Explanation / Answer

Part - A

Computation of WACC

WACC = 10.42%

Working notes

Kd = Interest (1-Tax Rate)

=9%(1-0.40)

=5.40%

ke = Risk Free Rate +Beta (Risk Market Return - Risk Free Rate)

=3%+1.50(10-3)

=13.50%

Part -2

Computation of WACC

WACC =8.84%

Return on Bond = Interest (1-tax)+RV-SV/n

_____________________

RV+SV/2

=80(1-0.40)+1000-900/20

____________________

1000+900/2

=5.58%

Particulars Cashflow Proportion % WACC 9% Debenture 6,000,000 0.3000 5.4% 1.62 7% Prefered Stock 2,000,000 0.1000 7% 0.70 Common Stock 12,000,000 0.6000 13.5% 8.10 Total 20,000,000 10.42%

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