Wacc and expected cost of new equity

The CEO of the company below would like to know the company's current weighted average cost of capital and the expected cost of new equity if the company were to issue new shares. I need you to see the steps to calculate this and list any assumptions.

I have been provide the information below:

The riskless rate is 4% and the expected return on the market is 8%. APPS4U has a tax rate of 40%. The company's policy is to use its

WACC as the reinvestment and financing rate when computing MIRRs.

APPS4U has 2.5 million shares outstanding, currently trading in the market at a price of $36 per share.

The most recent dividend on these shares was $2.25. The market expects dividends to grow at a 4% rate.

The company has two outstanding debt issues. The first has a $55m face value, a 10-year maturity, an 8% coupon rate, and a YTM of 7%.

The second issue is a 6-year zero coupon bond with face value $80m.

This bond is currently trading at a price of $50m.

The company is considering issuing an additional 500,000 shares of common stock. It estimates flotation costs would be $3 per share.

The company's CFO is currently considering two possible capital budgeting projects. Information concerning these projects is given in the below table.

Annual Project Cashflows
Project Beta 0 1 2 3 4 5
A 1.25 -1,250,000 -650,000 950,000 1,100,000 750,000 650,000
B 0.75 -1,800,000 900,000 700,000 400,000 400,000 750,000

Solution Preview :

Prepared by a verified Expert
Finance Basics: Wacc and expected cost of new equity
Reference No:- TGS01803023

Now Priced at $20 (50% Discount)

Recommended (91%)

Rated (4.3/5)

2015 ┬ęTutorsGlobe All rights reserved. TutorsGlobe Rated 4.8/5 based on 34139 reviews.