Question

WEIGHTED AVERAGE COST OF CAPITAL – P&G. Peñafiel and Godoy have an optimal capital structure that consists of 40% debt and 60% common equity. They expect to have $30,000,000 of new retained earnings available for investment for the next year.

• BONDS. Their investment bankers assure them that they could issue $8,000,000 (net of flotation costs) of $1000 face value bonds carrying a 10% coupon rate, paying annual interest, having a 10-year maturity, at a price of $900. Flotation costs for this issue would be $50 per bond.   Bonds issued beyond $8,000,000 will have a flotation cost of $100 per bond, a price of $900, a 10% coupon rate, and a 10-year maturity.

• COMMON STOCK. The current stock price is $60. The dividend paid yesterday was $9 per share. Dividends are expected to grow at a rate of 6%, forever. New shares of stock can be issued at $60 per share and flotation costs would be $3 per share.

• Peñafiel and Godoy have a corporate tax rate of 30%.

SKETCH THE MARGINAL COST OF CAPITAL SCHEDULE. LABEL ALL POINTS.

Answer 1

Marginal Cost of Capital (MCC):

• Changing cost depends on amount raised.
• An additional amount of capital that changes WACC ,which refers to a Break Point.

BREAKPOINT = Amount of capital at which sources cost of capital changes / Proportion of new capital raised from the source.

Break point = $30 million / 0.6 = $50million.

Capital structure Details:

Sources	Price	units	Toatl MV	%of total
Long term Debt	8000	1000	8000000	80.00%
Preffered stock	900	50	45000	45.00%
Common stock	60	60	1200	12.00%

Bond Details	Value
Tax Rate	30%
Coupon Rate	10%
Face Value	1000
Maturity	10
Flotation	3%

Preffered stock	Value
Dividend	$9
Flotation	3
CommonStock Data	Values
Dividend	$ 9
Growth Rate	6%
Floatation	3

WACC = 40%*6% + 60% * 10% = 8.4%

The MCCSchedule will look as follows:

Marginal WACC Schedule 101 WACC (4) 871 BA 2,000,000 8,000,000 4,000,000 : 6,000,000 Total capital