“BLACKFRIDAY” company is planning an expansion of its existing production capacity. The firm hired you as...

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Finance

“BLACKFRIDAY” company is planning an expansion of its existingproduction capacity. The firm hired you as a consultant for theexpansion project. Since you are a savvy project manager, you firstdecided to estimate the firm’s cost of capital based on theavailable data.
Data:
Tax Rate: 40%
Bond: Coupon rate 12%, Maturity Years 15, Present value$1150
Preferred Stock: Dividend rate 10%, Par Value $100, PresentValue $111 Common Stock: Market price $50, D₀=$4.20,Dividend growth 5%, Beta 1.2, Treasury Bond yield 7%, Market riskpremium 6%. When the firm uses Bond-yield+Premium method, the riskpremium is 4%.
Capital structure of ABC is as follows;
Debt 30%, Common Equity 60%, Preferred Stock 10%
Next, you asked your assistant “Mr.COUPON” to give his opinionon the following burning questions;
What is your final Cost of Equity?
Do you agree that the cost of new equity is cheaper than thecost of retained earnings? Why?
What is flotation cost and how do you adjust it?
If the flotation cost of new stock issue is 10%, what is theestimated cost of equity considering the 10% flotation cost underDCF method you calculated in question iv above?(cost of equity using discounted cashflow technique is 15.50%)

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i Cost of debt PV 1150 FV 1000 PMT annual coupon coupon rateFV 121000 120 n 15 solve for RATE YTM 1003 Note Question does not specify whether the bond is annual or semiannual so annual has been assumed Cost of equity using bond premium cost of See Answer

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