BUS 401 Week 3 Chapter 9 Mini Case

BUS 401 Week 3 Chapter 9 Mini Case

Asked by 6 years ago
407.5k points

BUS 401 Week 3 Chapter 9 Mini Case

The balance sheet that follows indicates the capital structure for Nealon Inc. Flotation costs are (a) 15 percent of market value for a new bond issue, and (b) $2.01 per share for preferred stock. The dividends for common stock were $2.50 last year and are projected to have an annual growth rate of 6 percent. The firm is in a 34 percent tax bracket. What is the weighted average cost of capital if the firms finances are in the following proportions?



Bonds (8%, $1,000 par, 16-year maturity) 38%

Preferred stock (5,000 shares outstanding, $50 par, $1.50 dividend) 15%

Common equity   47%

Total 100%

a.    Market prices are $1,035 for bonds, $19 for preferred stock, and $35 for common stock. There will be sufficient internal common equity funding (i.e., retained earnings) available such that the firm does not plan to issue new common stock. Calculate the firms weighted average cost of capital.

b.    In part a we assumed that Nealon would have sufficient retained earnings such that it would not need to sell additional common stock to finance its new investments. Consider the situation now, when Nealons retained earnings anticipated for the coming year are expected to fall short of the equity requirement of 47 percent of new capital raised. Consequently, the firm foresees the possibility that new common shares will have to be issued. To facilitate the sale of shares, Nealons investment banker has advised management that they should expect a price discount of approximately 7 percent, or $2.45 per share. Under these terms, the new shares should provide net proceeds of about $32.55. What is Nealons cost of equity capital when new shares are sold, and what is the weighted average cost of the added funds involved in the issuance of new shares?

BUS 401

1 Answer

Answered by 6 years ago
393k points

Oh Snap! This Answer is Locked

 BUS 401 Week 3 Chapter 9 Mini Case

Thumbnail of first page

Excerpt from file: Chapter9MiniCase ThebalancesheetthatfollowsindicatesthecapitalstructureforNealon Inc.Flotationcostsare(a)15percentofmarketvalueforanewbond issue,and(b)pershareforpreferredstock.Thedividendsfor commonstockwerelastyearandareprojectedtohaveanannual

Filename: Week 3 - Assignment - Chapter 9 Mini Case - BUS401 Principles of Finance.zip

Filesize: 22.2K

Downloads: 10

Print Length: 3 Pages/Slides

Words: 146

Your Answer

Surround your text in *italics* or **bold**, to write a math equation use, for example, $x^2+2x+1=0$ or $$\beta^2-1=0$$

Use LaTeX to type formulas and markdown to format text. See example.

Sign up or Log in

  • Answer the question above my logging into the following networks
Sign in
Sign in
Sign in

Post as a guest

  • Your email will not be shared or posted anywhere on our site

Views: 1.3k
Asked: 6 years ago