Question

ANC Company is considering a few expansion projects that have been proposed by the Finance Manager....

ANC Company is considering a few expansion projects that have been proposed by the Finance Manager. You are given the task to develop an estimate of the firm's cost of capital.

Given :
- Current outstanding bonds are trading at $1230 with 8% annual payment and 20 years to maturity. The firm estimates the issuance cost for new bonds would be $8 per bond.

- ANC's shares are currently trading at $68 per share. Its last dividend was $6 and dividends are expected to grow at a constant rate of 3% in the foreseeable future. Floatation cost is estimated at $2 per share.

- The current price of the firm's 12%, $100 par value, perpetual preferred share is $108

- The firm's target capital structure is 60% long term debt, 10% preferred share and 30% common share.

- The firm is in the 35% tax bracket.

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Homework Answers

Answer #1

cost of debt

Using rate function in MS excel

rate(nper,pmt,pv,fv,type) nper = 20 pmt = 80 fv = 1280-8 = 1272 fv =1000 type = 0

5.69%

after tax cost of debt

before tax cost of debt*(1-tax rate)

5.69*(1-.35)

3.6985

cost of common stock = preferred dividend/net proceeds

6*(1.03)/(68-2) + growth

12.36%

cost of preferred stock

preferred dividend/net proceeds

12/108

11.11%

WACC

source

weight

cost

weight*cost

debt

0.6

3.6985

2.2191

preferred stocl

0.1

11.11

1.111

common stock

0.3

12.36

3.708

WACC in %

sum of weight*cost

7.04
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