Given the following information for a publically traded firm:
10 Year Treasury Bond Yield = 2.30%
Common Share Beta = 1.5
Expected Market Risk Premium between 4.00% and 6.00%
Common Share Price = $13.00
Common Share Dividend = $0.30
Common Shares Outstanding = 100 million
Preferred Share Dividend = $2.00
Preferred Shares Outstanding = 3 million
Preferred Share Dividend Yield = 6%
Debt Maturity = 20 Years
Coupon Rate on Debt = 4.00% (assume annual coupon payments)
Spread to Treasury Yield = 1.30%
Book Value of Debt = $700 million
Tax Rate = 20%
(a) Calculate the firm’s weighted average cost of capital (WACC).
(b) What is the flotation cost and Marginal Cost of Capital (MCC) for equity if the firm needs to raise $500 million of new equity? You may assume that the shares are issued at $13.00 a share, that the pre-tax underwriting fees are 3.30%, that the firm pays fixed pre-tax offering fee of $3.5 million, and that you may use your results from part a) in your answer.
(c) What is the firm’s new WACC, if the firm uses $350 million of the equity issue in part (b) to retire outstanding debt. You may assume that with a lower debt level, the firm’s beta is now 20% lower, that the firm’s share price hasn’t changed, and that you may use your results from parts a) and b) in your answer.