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.

 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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