Stardom Manufacturing Company (SMC) is in the construction industry for many years. Recently, the issue of financing has been raised since the company is concerned about additional financing of the company and the sources of funding. A recent audit of the company’s financial position has indicated the following details: The company has acquired a bond at face value with an interest rate of 10%. The can issue new Preference shares at $7.50 per share and offer dividend of $75 per share. The ordinary shares of Stardom has a market value of $60 per share and the firm is expecting to pay dividend of $4.50 per share one year later with anticipated growth rate of dividend of 6%. The company’s tax rate is 40%. TASK 1: using the above information help the financial controller to calculate: The cost of Debt financing after tax. The cost of Ordinary Share financing. The cost of Preference Shares financing. TASK 2: Using information above, what is the weighted average cost of capital (WACC) if Stardom’s capital structure is as follows? 55 % Debt financing 40% Equity Financing 5 % Preference share financing TASK 3: Stardom has an option to restructure its financing and is advised to use the following capital structure instead: 35% Debt financing 55% Equity financing 10 % Preference Shares financing What would be the new WACC if this advice is executed. Task 4: Provide THREE possible reasons for the difference in WACC calculated in TASK2 and TASK 3.
Stardom Manufacturing Company (SMC) is in the construction industry for many years. Recently, the issue of financing has been raised since the company is concerned about additional financing of the company and the sources of funding. A recent audit of the company’s financial position has indicated the following details:
- The company has acquired a bond at face value with an interest rate of 10%.
- The can issue new Preference shares at $7.50 per share and offer dividend of $75 per share.
- The ordinary shares of Stardom has a market value of $60 per share and the firm is expecting to pay dividend of $4.50 per share one year later with anticipated growth rate of dividend of 6%.
- The company’s tax rate is 40%.
TASK 1: using the above information help the financial controller to calculate:
- The cost of Debt financing after tax.
- The cost of Ordinary Share financing.
- The cost of Preference Shares financing.
TASK 2: Using information above, what is the weighted average cost of capital (WACC) if
Stardom’s capital structure is as follows?
55 % Debt financing
40% Equity Financing
5 %
TASK 3: Stardom has an option to restructure its financing and is advised to use the following capital structure instead:
35% Debt financing
55% Equity financing
10 % Preference Shares financing
What would be the new WACC if this advice is executed.
Task 4: Provide THREE possible reasons for the difference in WACC calculated in TASK2
and TASK 3.
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