To assist with evaluating potential capital projects, Carrium Insights Inc. is seeking to determine its actual Weighted Average Cost of Capital (WACC).
Utilising information from the financial statements, together with current information, the Finance Manager has compiled the following information as it pertains to the company’s capital structure:
Debt: Bonds outstanding has a face value of $568,000,currently selling at 95% of par. These bonds have 20 years left to maturityandacoupon rate of 7.55%.(Hint: you can use the lowest multiple of $1,000 for the YTM calculation only)
Common stock: 21,000 shares of common stock outstanding with a market price of $63.00.The company just paida dividend of $6.00; for ease of computation, dividends are expected to grow by 5% annually.
Preferred stock:The company intends to offer 15,000 shares of preferred stock to the public at a price of $25.00 per share. The intention is to pay an annual dividend of $3.00.
Additional Information:
✓The Company’s tax rate is 20%.
Required: Calculate the Weighted Average Cost of Capital for Carrium Insights Inc.
Additional Info If you need it:
ProForma Income Statement
|
Particulars |
Amount |
Amount |
|
Sales [a] |
2800000 x 1.15 |
3,220,000 |
|
Less Cost of Goods Sold |
1400000 x 1.15 =1,610,000 |
|
|
Less Selling & Marketing Costs |
75000 x 1.15 = 86,250 |
|
|
Less Admin Expenses |
25000 x 1.15 = 28750 |
|
|
Less DepreciationExps.[Unchanged] [b] |
50,000 |
1,775,000 |
|
EBIT [a-b] [c] |
|
1,445,000 |
|
Less Interest [d] |
|
20,000 |
|
EBT [c-d] [d] |
|
1,425,000 |
|
Less Income Tax at 20% [e] |
|
285,000 |
|
Net Income [d-e] [f] |
|
1,140,000 |
|
Dividend Pay -out 50% [f/2] [g] |
|
570,000 |
|
Addition to |
|
570,000 |
Proforma Balance Sheet:
|
Liabilities |
Amount |
Amount |
Assets |
Amount |
Amount |
|
Current Liabilities |
2220 x1.15 |
2,553,000 |
Current Assets |
2360 x 1.15 |
2,714,000 |
|
Total Equity |
1812+570 |
2,382,000 |
Non Current Assets[Unchanged] |
2240 |
2,240,000 |
|
Non Current Liabilities |
|
19,000*** |
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4,954,000 |
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4,954,000 |
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*** balancing figure. |
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No additonal |
finance is required |
in 2021 |
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