Boxer & Company are planning to enter export market. The Company needs to spend around $300 million to balance and upgrade manufacturing facilities to cater for new markets. The firm’s present optimal capital structure is as under. Long-term debt $180,000,000 Common equity 170,000,000 Total liabilities and equity $ 350,000,000 New bonds will have a 12 percent coupon rate and will be sold at par. Common stock, currently selling at $80 a share, can be sold to net the company $76 a share. Stockholders’ required rate of return is estimated to be 15 percent comprising of 9% dividend yield and 6% growth. Retained earnings are estimated to be $ 100 million. The marginal tax rate is 35%. Required: (a.) To maintain the present capital structure, how much of the capital budget can be financed by debt and equity? (b.) How much of the needed funds will be generated internally and externally? (c.) Calculate the cost of each of the equity components? (d.) At what level of the capital expenditure will there be a break in the MCC schedule? (e.) Calculate the WACC below the break in MCC schedule. (f.) Calculate the WACC above the break in MCC schedule.
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
Boxer & Company are planning to enter export market. The Company needs to spend around $300 million to balance and upgrade manufacturing facilities to cater for new markets. The firm’s present optimal capital structure is as under.
Long-term debt $180,000,000
Common equity 170,000,000
Total liabilities and equity $ 350,000,000
New bonds will have a 12 percent coupon rate and will be sold at par. Common stock, currently selling at $80 a share, can be sold to net the company $76 a share. Stockholders’ required
Required:
(a.) To maintain the present capital structure, how much of the capital budget can be financed by debt and equity?
(b.) How much of the needed funds will be generated internally and externally?
(c.) Calculate the cost of each of the equity components?
(d.) At what level of the capital expenditure will there be a break in the MCC schedule?
(e.) Calculate the WACC below the break in MCC schedule.
(f.) Calculate the WACC above the break in MCC schedule.
The answer should be on excel thanks.
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