FINANCIAL MANAGEMENT

Financial Management

On all percentages, add two spaces after the decimal point. ***
Part 1 To make a few capital budgeting decisions, Bremond Equipment Supply Corporation (BESC) needs to know what its weighted average cost of capital is. The corporation has already decided on the capitalization ratio. Calculate the firm’s WAAC using these ratios.
Source of Capital Proportions and Target Market
25% in long-term debt, 6% in preferred stock
Equity in common shares is 69%.
Debt: BESC is able to sell a 15-year, 8.75 percent, $1,000 par value bond for $985. In addition to the $15 discount, a flotation cost equal to 1.75 percent of the face value would be needed.
BESC has concluded that it is able to issue preferred stock at a par value of $70 per share. The stock will distribute a $8 yearly dividend. Each unit of stock costs $2 to issue and sell.
Common Stock: The current share price of BESC’s common stock is $39. At the end of the upcoming year, a dividend of $5 is anticipated to be paid. For the past five years, the dividend payments have increased steadily. The dividend was $3.50 five years ago. A fresh common stock issuance is anticipated to need to be underpriced at $4 per share in order to sell, and the company will also need to pay flotation fees of $1 per share.
Additionally, the marginal tax rate for the company is 40%.
We shall deconstruct this challenge into steps to help establish the firm’s WACC.
A. Determine the interest rate for the newly issued bonds, taking into account their semi-annual compounding.
B. Determine the bond issue’s after-tax cost.
C. Determine the price of the new preferred stock issuance.
D. Determine the growth rate of the dividends paid on common shares.
E. Determine the price of the new issue of common stock.
F. Finally, determine the company’s weighted average cost of capital under the assumption that all retained earnings have been used.
To receive full credit for the issues, be sure to explain how you arrived at your solutions.***

On all percentages, add two spaces after the decimal point. ***
Bremond Equipment Supply Corporation, in Part 1B, is now thinking about investing in two separate projects, A and C, which are detailed below. Please don’t make any assumptions. To evaluate the projects, use the firm’s WACC that you just determined.

Option C Initial Investment Option A Yearly Cash Inflows (CF) $3,250,000 $3,900,000
1 $1,500,000 $2,500,000 2 1,000,000 1,800,000 3 1,500,000 900,000 4 1,500,000 850,000
This chart should not be copied and pasted into an Excel file. Excel is calculating it erroneously because of the formatting!

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A. Determine the payback periods for the two projects.
B. Determine the NPV of each project.
C. Determine the PI for each project.
D. Determine the IRR for each project.
E. Which project ought the company to take on? Why?

Part 2
Another business is calculating its WACC at the moment. You must compute your solution to this problem using the CAPM.
(This problem is entirely independent of Parts 1A and 1B; it contains all the necessary details.)
The market is anticipated to return 7.5% annually, and the present risk-free rate is 2.5%. Beta for the company is 2.1. The business anticipates paying 6.0% of its debt. The company’s target capital structure is 45% debt and 55% equity. 37% is the marginal tax rate.
A. How much does debt cost after taxes?
B. How much does equity cost?
C. Determine the WACC.
To receive full credit for the issues, be sure to explain how you arrived at your solutions.***

 

 

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