Post her answers, including showing your work and also how you got your answers to every question.

You are watching: If a firm needs additional capital from equity sources

1. NCC coporation, group is considering building a new facility in Texas. To raise money because that the resources projects, the corporation plan the following capital structure: 30% of money will certainly come from issuing bonds, and 70% will come indigenous Retained income or brand-new common stock. The corporation go not right now have desired stock. NCC coporation, group will issue bonds with an interest price of 8% approximately $30 million dollars in bonds. After ~ issuing $30 million in bonds, the interest cost will increase to 12.5%. The following dividend on usual stock is supposed to be $2.00 per share. The stock price is $25.00 per share, and is intended to prosper at 3% per year. The flotation cost for issuing brand-new common share is estimated at 10%. NCC Corporation has $66 million in retained income that have the right to be used. The tax rate for NCC coporation, group is 35%.

A. What is the initial sweet Average price of resources (WACC) for NCC Corporation?

B. There room two breakpoints in NCC"s capital structure. At what point does the first breakpoint occur?

C. In ~ what point does the 2nd breakpoint occur?

D. What is the weighted Average expense of capital (WACC) after the first breakpoint?

E. What is the WACC ~ the second breakpoint?

F. The complying with projects are accessible for NCC copy, group to take into consideration choosing.

Cost Cash circulation Each Year IRR
Project A $25 Million $7 Millions for 5 Years 12.38%
Project B $50 Million $15 Millions for 5 Years 15.24%
Project C $30 Million $7.5 Million because that 6 years 13%
Project D $30 Million $8.8 Million for 5 Years 14.29%
Project E $40 Million $11 Million for 5 years 11.65%

Which projects need to NCC accept, if any, and in i beg your pardon order need to they it is in chosen?


Weighted Average cost of Capital

A certain has identified its optimal resources structure, i m sorry is illustrated by the information below.

Source of resources (Target market Proportions)

Long term debt (20%)

Preferred stock (10)

Common share Equity (70)

To increase operations, the firm is considering the complying with sources of financing its capital expenses:

Debt -The firm deserve to sell 12-year, 1,000 par worth bond payment a 7% yearly coupon for $960. To issue the link the for sure will need to pay bond issuance or flotation price of 2 percent the the challenge value that the bond.

Preferred Stock- the firm has determined that the can problem preffered share at a par worth price the $75 every share. The stock will certainly pay $10 yearly dividend. The price of issuing and selling the share is $3 every share.

Common Stock: A firms common stock is currently selling because that $18 per share. The dividend intended to be paid at the finish of the comes year is $1.74. The that company dividends have been farming at a continuous rate of 4% per year for the last 4 years and also are expected to sustain that development rate thereafter.

New common stock issue- if the for sure decides come issue new common stock, the underwriter suggested that the concern will have to be underpriced by $1 below the current share price. Further, the for sure will need to pay $1 every share in issuance or floatation cost.

Additionaly, the firms marginal that company tax price is 40 percent.

(Given the information above)

A) uncover the firms before-tax expense of blame financing

B) discover the this firm after-tax cost of blame financing

C) uncover the firms expense of preffered share financing

D) find the firms cost of financing using the kept earnings

e) discover the firms price of financing using a brand-new common share issue

f)find the this firm weighted average expense of capital, if the firm provides debt, preffered stock and also retained earnings to finance the investments. Provided this result, define what rate of return the firm must require indigenous its investors.

g) uncover the this firm weighted average cost of capital, if the firm uses debt, preffered stock, retained earnings, and brand-new stock concern to finance the investments. Given this results, explain what price of return the firm have to require native its investments.


Jordan Co."s CFO is do the efforts to identify the company"s WACC. That has figured out that the company"s before-tax price of debt is 8.7%. The firm currently has $100,000 that debt, and also the CFO believes that the book value the the company"s debt is a an excellent approximation for the sector value that the company"s debt. * The firm"s expense of wanted stock is 9.9%, and the publication value of wanted stock is $10,500. * Its expense of equity is 13.2%, and also the firm currently has actually $85,000 of usual equity ~ above its balance sheet. * The CFO has estimated that the firm"s sector value of wanted stock is $30,000, and also the market value that its typical equity is $140,000. Recognize Jordan"s WACC if its subject to tax price of 40%.

Kuhn agency is considering a new project that will call for an initial invest of $20 million. It has actually a target capital structure the 35% debt, 2% wanted stock and 63% common equity. Kuhn has actually noncallable bonds superior that mature in 5 years v a confront value of $1,000, an yearly coupon rate of 10%, and a sector price that $1,050.76. The productivity on the company"s present bonds is a an excellent approximation the the productivity on any brand-new bonds that it issues. The company can market shares of wanted stock that pay an yearly dividened of $9 at a price the $95.70 per share. You have the right to assume the Jordan does no incur any flotation costs when issuing debt and preferred stock.

See more: Stress Relief Gloves For Crocheting, Stress Relief Gloves, Do They Really Work

Kuhn does not have any retained earnings available to finance this project, so the firm will have to issue new common stock to assist fund it. Its common stock is at this time selling because that $22.35 per share, and it is supposed to salary a dividend that $1.36 at the end of following year. Flotation prices will represent 8% the the funds increased by issuing brand-new common stock. The firm is projected to thrive at a continuous rate of 8.7%, and also they challenge a tax price of 40%. What is Kuhn"s WACC because that this project? Please present work.