30.08.2019 п»їIntegrative Case 4: Environment Plastics Business

This case focuses on determination off the cost of capital for a company. The student establishes the cost of specific sources of funding, including long lasting debt, favored stock, and common stock. The cost of debt is modified for Environment Plastics' forty percent tax group. The company is definitely considering a brand new financial composition, with the replacement of preferred share financing with debt auto financing. Additional make use of debt enhances the common stockholders' required level of come back. The student comes up to compare the two measured average costs of capital and discover the better financial framework for Ecosystem Plastics Organization.

a. Cost of debt:

Proceeds from sale of \$1, 000 equiparable value bond:

\$1, 1000 в€’ (average discount & floatation costs)

\$1, 1000 в€’ (\$45 + \$32) = \$923

Subsequent payments: Interest payments (\$1, 000 Г— 0. 105) + Similar value

Before-tax cost of debt

N = 20, PHOTOVOLTAIC = \$923, PMT = в€’105, FV = в€’1, 000

Fix for I = eleven. 50%

After-tax cost of financial debt: ri = rd (1-T) = eleven. 5% (1в€’0. 4) = 6. 9%

b. Cost of preferred inventory: rp = Dp Г· Np

= (0. 095 Г— \$95) Г· (\$95 - \$7)

= \$9. 02 Г· \$88

sama dengan 10. 25%

c. Cost of common stock: rj sama dengan RF & [bj Г— (rm в€’ RF)]

= 0. 04 + [1. 3 Г— (0. 13 в€’ 0. 04)]

= 0. '04 + [1. a few Г— zero. 09]

= 0. 04 & 0. 1170

= 15. 7%

deb. Weighted typical cost of capital: ra = (wi Г— ri) + (wp Г— rp) + (ws Г— rn) = (0. 30 Г— zero. 069) + (0. twenty Г— 0. 1025) + (0. 60 Г— 0. 157)

= 0. 0207 + 0. 0205 + 0. 785

= zero. 1197, or about 12%

e. 1 ) Change in risk Premium: Enhancements made on beta Г— market risk premium sama dengan (1. five в€’ 1 . 3) Г— (0. 13 в€’ 0. 04)

sama dengan 0. two Г— zero. 09 sama dengan 0. 018

Shareholders require 1 . 8% more per year

New expense of common fairness: rj sama dengan RF + [bj Г— (rm в€’ RF)]

= 0. '04 + [1. a few Г— (0. 13 в€’ 0. 04)]

= 0. apr + [1. your five Г— zero. 09]

= 0. 04 + 0. 1350

= 17. 5%

Notice: 17. 5% в€’ 12-15. 7% = 1 . 8%

2 . Revised weighted average cost of capital: ra= (wi x ri) + (ws x rn) = (0. 50 Г— 0. 069) + (0. 50 Г— 0. 175)

= 0. 0345 & 0. 0875

= 0. 1220

a few. Eco Plastics' CFO will need to retain the less expensive current...