10) Please prepare a simple balance sheet for The BBQ Company before a) and afte

Question

10) Please prepare a simple balance sheet for The BBQ Company before a) and after b) the change in capital structure. The company currently has total assets of $12,000,000. They want to expand with an additional plant in West Palm Beach at a cost of $5,000,000. The new operation will be financed in its entirety with preferred equity from Miramar Trust. The company's tax rate is 40%. Miramar Trust will receive a $4 dividend on each share of its preferred stock of $50.00. The equity of the company is 40% with an annual cost of 4%, 50% of the original capital structure is in debt with a rate of 8% and the remainder is in preferred equity at the same rate as of the new preferred stock which is also held by Miramar Trust. a) Calculate the WACC before expansion b) Calculate WACC after the expansion. c) How many shares will Miramar Trust hold in The BBQ company after the expansion?

Explanation / Answer

Part - A

Calculation of WACC before Expansion

WACC =4.80%

Notes

Preferred Stok % = Preferred Dividend /Share Value

=4/50

=0.08 or 8%

Kd (Cost of Debt)= Interest (1-Tax)

=8%(1-0.40)

=4.80%

Part - B

WACC after the Expansion

WACC After Expansion = 5.75%

Part - C

Miramar Trust hold in the the BBQ company after the expansion

Number of Preferred Stock = Total Preferred Stock Value/Preferred Share Value

=6,200,000(1200000+5000000)/(50)

=124,000 Preferred Stock

Particulars Cashflow Proportion % WACC Preferred Stock 1,200,000(12 Million *10%) 0.10 8%(Notes) 0.80 Equity 4,800,000(12 Millionn*40%) 0.40 4% 1.60 Debt 6,000,000(12 Million *50%) 0.50 4.80%(Notes) 2.40 Total 12,000,000 1.00 4.80%

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