Halfdome is considering a major expansion program that has been proposed by the company’s information technology group. Before proceeding with the expansion, the company must estimate its cost of capital. Suppose you are an assistant to Jerry Lehman, the financial vice president. Your first task is to estimate Halfdome’s cost of capital. Lehman has provided you with the following data, which he believes may be relevant to your task. *The firm’s tax rate is 25%. *The current price of Coleman’s 12% coupon, semiannual payment, noncallable bonds with 15 years remaining to maturity is $1,153.72. Coleman does not use short-term, interest-bearing debt on a permanent basis. New bonds would be privately placed with no flotation cost. *The current price of the firm’s 10%, $100.00 par value, quarterly dividend, perpetual preferred stock is $111.10. *Halfdome’s common stock is currently selling for $50.00 per share. Its last dividend (D0) was $4.19, and dividends are expected to grow at a constant annual rate of 5% in the foreseeable future. Halfdome’s beta is 1.2, the yield on T‑bonds is 7%, and the market risk premium is estimated to be 6%. For the bond-yield-plus-risk-premium approach, the firm uses a risk premium of 4%. *Halfdome’s target capital structure is 30% debt, 10% preferred stock, and 60% common equity. To structure the task somewhat, Lehman has asked you to answer the following questions. Halfdome estimates that if it issues new common stock, the flotation cost will be 15%. Halfdome incorporates the flotation costs into the discounted cash flow (DCF) approach. 1.What is the estimated cost of newly issued common stock, considering the flotation cost? a. 17.9%; b. 18.4%; c. 12.3% d. 13.8%; e. None of the above 2. What is Halfdome’s overall, or weighted average, cost of capital (WACC) based on the above problem? Consider to include the effect of the flotation costs.
Cost of Debt, Cost of Preferred Stock
This article deals with the estimation of the value of capital and its components. we'll find out how to estimate the value of debt, the value of preferred shares , and therefore the cost of common shares . we will also determine the way to compute the load of every cost of the capital component then they're going to estimate the general cost of capital. The cost of capital refers to the return rate that an organization gives to its investors. If an organization doesn’t provide enough return, economic process will decrease the costs of their stock and bonds to revive the balance. A firm’s long-run and short-run financial decisions are linked to every other by the assistance of the firm’s cost of capital.
Cost of Common Stock
Common stock is a type of security/instrument issued to Equity shareholders of the Company. These are commonly known as equity shares in India. It is also called ‘Common equity
Halfdome is considering a major expansion program that has been proposed by the company’s information technology group. Before proceeding with the expansion, the company must estimate its cost of capital. Suppose you are an assistant to Jerry Lehman, the financial vice president. Your first task is to estimate Halfdome’s cost of capital. Lehman has provided you with the following data, which he believes may be relevant to your task.
*The firm’s tax rate is 25%.
*The current price of Coleman’s 12% coupon, semiannual payment, noncallable bonds with 15 years remaining to maturity is $1,153.72. Coleman does not use short-term, interest-bearing debt on a permanent basis. New bonds would be privately placed with no flotation cost.
*The current price of the firm’s 10%, $100.00 par value, quarterly dividend, perpetual
*Halfdome’s common stock is currently selling for $50.00 per share. Its last dividend (D0) was $4.19, and dividends are expected to grow at a constant annual rate of 5% in the foreseeable future. Halfdome’s beta is 1.2, the yield on T‑bonds is 7%, and the market risk premium is estimated to be 6%. For the bond-yield-plus-risk-premium approach, the firm uses a risk premium of 4%.
*Halfdome’s target capital structure is 30% debt, 10% preferred stock, and 60% common equity.
To structure the task somewhat, Lehman has asked you to answer the following questions. Halfdome estimates that if it issues new common stock, the flotation cost will be 15%. Halfdome incorporates the flotation costs into the discounted cash flow (DCF) approach.
1.What is the estimated cost of newly issued common stock, considering the flotation cost?
a. 17.9%; b. 18.4%; c. 12.3% d. 13.8%; e. None of the above
2. What is Halfdome’s overall, or weighted average, cost of capital (WACC) based on the above problem? Consider to include the effect of the flotation costs.
- 14.01%
- 15.42%
- 11.62%
- 12.39%
- None of the above
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