Tiffany Baking Co. wants to arrange for $37.5 million in capital for manufacturing a new baked potato chip product line. The current financing plan is 60% equity and 40% debt capital. Calculate the expected WACC for the following financing scenario:
Equity capital: 60%, or $22.5 million, via common stock sales for 40% of this amount that will pay dividends at a rate of 5% per year, and the remaining 60% from retained earnings, which currently earn 9% per year.
Debt capital: 40%, or $15 million, obtained through two sources: bank loans for $10 million borrowed at 8% per year, and the remainder in convertible bonds at a coupon rate estimated to be 10% per year.
WACC = cost of debt capital + cost of equity capital
= (0.4)[0.667(8%) + 0.333(10%)] + (0.6)[(0.4)(5%) + (0.6)(9%)]
= 0.4[8.667%] + 0.6 [7.4%]
= 7.91%
You might also like to view...
When performing 10 experiments the RV X produces the following realizations:
2, 1, -1, 0, 3, 5, -1, 2, 0, 1 Ave(X) = _____ and Var(X) = _____.
A section of highway has a superelevation of 0.05 and a curve with a radius of only 300 ft. What is the maximum safe speed at this section of the highway?
What will be an ideal response?
Genes are located on the _____ and are composed of DNA
a. ovaries c. chromosomes b. male sex organ d. zygotes
Technician A says that diamonds indicate a component that conditions fluid in the circuit, such as a filter or heat exchanger. Technician B says that dashed lines indicate a return or exhaust circuit. Who is correct?
A. Technician A B. Technician B C. Both D. Neither