1 / 9

New Equity Issuance

New Equity Issuance. Cost of External Equity

ivan-hartman
Télécharger la présentation

New Equity Issuance

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. New Equity Issuance • Cost of External Equity • Ex. Suppose Archer’s Aquarium Equipment may continue to issue unlimited amounts of common equity at a floatation cost of 8%. The firm recently paid a common stock dividend of $3 per share, and the firm’s dividends are expected to grow by 3% per annum. If the firm’s current stock price is $40 per share, what is the cost of external equity for Archer’s Aquarium Equipment?

  2. Weighted Average Cost of Capital • Given an optimal capital structure of 60% common equity, 30% debt, and 10% preferred stock, what is Archer’s Aquarium Equipment’s weighted average cost of capital (WACC) for capital budgets in excess of $50 million?

  3. Optimal Capital Budget • Investment Opportunity Schedule (IOS) - • Ex. Archer’s Aquarium Equipment can select among the following projects:

  4. Optimal Capital Budget % New Capital Raised • Which projects should Archer’s Aquarium Equipment undertake?

  5. Comprehensive Example • Ex. Ling’s Libation Barn has 4 potential capital investment projects with the following costs and rates of return: • LLB estimates it can issue debt with a before-tax cost of 10 percent, and its marginal federal-plus-state tax rate is 30 percent. Ling’s Libation Barn may also issue preferred stock at $50 per share, which pays a constant dividend of $5 per year. The floatation cost on preferred stock issuance is $1 per share. • In addition, net income is expected to be $250,000, and the firm plans to maintain its current dividend payout ratio of 40%. The firm’s stock is currently selling for $40 per share. The year-end dividend (D1) is expected to be $3.50, and the dividend growth rate is expected to be constant at 6% per year into the foreseeable future. Floatation costs of issuing new common stock equal $4 per share (F=10%), and LLB’s optimal capital structure consists of 75% common equity, 15% debt, and 10% preferred stock.

  6. Retained Earnings Break Point • What is LLB’s retained earnings break point?

  7. Capital Component Costs • What is LLB’s component cost of debt? • What is LLB’s component cost of preferred stock? • What is LLB’s component cost of retained earnings? • What is LLB’s component cost of new common equity?

  8. Weighted Average Cost of Capital • What is LLB’s weighted average cost of capital for capital budgets <$200,000? • What is LLB’s weighted average cost of capital for capital budgets > $200,000?

  9. Optimal Capital Budget • What should be the size of LLB’s optimal capital budget?

More Related