Question

P16-10 Monica is the CFO of Cooking for Friends​ (CFF) and uses the pecking order hypothesis philosophy when she raises capital for company projects. ​ Currently, she can borrow up to ​$450 000 from her bank at a rate of 7.75​%, float a bond for ​$750,000 at a rate of 9.25​%, or issue additional stock for ​$1,400,000 at a cost of 18​%. Chandler has been hired by CFF to raise capital for the company. Chandler increases the funding available from the bank to ​$950,000​, but with a new rate of 8.25​%. What is the WACC for borrowing

a.​$1 ,000,000​?

b.​$1 ,800,000​?

c.​$3,100,000​?

What is the WACC for CFF if it chooses to invest

​$1,000,000 in new​ projects?

Answer 1

a) ​$1 ,000,000​?

$950,000 can be borrowed from bank at 8.25%

rest of $50000 can be borrowed through bond at 9.25%

WACC= ($950,000/100000)*8.25% + ($50000/100000) * 9.25% = 8.3%

b) ​$1 ,800,000​?

$950,000 can be borrowed from bank at 8.25%

rest of $750000 can be borrowed through bond at 9.25%

rest of $100000 can be borrowed through stock issue at 18%

WACC= ($950,000/1800000)*8.25% + ($750000/1800000) * 9.25% +($100000/1800000)* 18% = 9.21%

a) ​$31 ,000,000​?

$950,000 can be borrowed from bank at 8.25%

rest of $750000 can be borrowed through bond at 9.25%

rest of $1400000 can be borrowed through stock issue at 18%

WACC= ($950,000/3100000)*8.25% + ($750000/3100000) * 9.25% +($1400000/3100000)* 18% = 12.89%