Assignment task:
Based in Winnipeg, Manitoba, Defence Electronics Inc. (DEI) was founded to provide security systems, facilities controls and related services. DEl established a solid reputation for quality and the business grew thanks to strong relationships with large, long-term customers in Canada and the United States.
The Research and Innovation Group (RIG) is the development side of the company. They are considering a new contract that will strain resources for not only RIG, but the entire company. With an upfront cost of $5.0 million, managers understand that the cost of capital will be a key part of maintaining and improving Clearview's competitive edge. You have been asked to calculate the company's weighted average cost of capital (WACC), based on the following information.
Over the last five years the annual dividends on the firm's common stock have grown at 6.00 percent per year and this growth is expected to continue indefinitely. A common share dividend of $2.410 per share was recently paid. Common shares trade at $44.000 per share. The company has authorized 576,000 common shares, with 432,000 common shares issued and outstanding.
The company has issued 109,000 of the 138,000 preferred shares authorized. The annual preferred share dividend is $1.050 per share. The latest preferred share price is $49.100 per share.
DEI has an outstanding bond issue, payable semi-annually, that originally had a 25 year maturity. The initial bond offering was sold 8 years ago, at par and raised $22.50 million dollars. (To be specific 22,500 bonds were sold at $1,000 each.) The yield to maturity, when they were issued, was 6.40 percent. Currently, the nominal yield to maturity on bonds with a similar risk is at 6.98 percent.
The company will use its current capital structure to set target weights for debt, preferred shares and common shares. Flotation costs are 4.00 percent for preferred shares, 6.00 percent for common shares and 5.00 percent for debt. The company's tax rate is 45.00 percent. After-tax earnings for the year will be $4.00 million and the company has a payout ratio of 45 percent.
1. Bonds:
a. What is the market value of each bond?
(Enter your answer to two decimal places. (e.g. $12.34))
b. What is the total market value of bonds at Dec 31, 2020
(Round your answer to whole numbers. For example, $1,234,000 not $1.234 million.)
2. Preferred shares: What is the total market value of preferred shares at Dec 31, 2020
(Round your answer to whole numbers. For example, $1,234,000 not S1.234 million.)
3. Common shares: What is the total market value of common shares at Dec 31, 2020
(Round your answer to whole numbers. For example, $1,234,000 not $1.234 million.)
B. What weights are assigned to debt, preferred shares and common equity on Dec 31, 2020
(Round all your answers to two decimal places. If you want to enter the number 12.34%, for example, enter 12.34 (not 0.1234) and do not enter the percent sign.)
C. Calculate the after-tax cost of the various components of WACC:
(Round all your answers to two decimal places. If you want to enter the number 12.34%,
1. Bonds
a. What is the nominal yield-to-maturity?
b. What is the effective yield-to-maturity?
c. Calculate the after-tax cost of new debt (using the effective yield-to-maturity).
2. Preferred shares:
3. Common equity in the form of retained earnings:
4. Common equity in the form of new shares:
D. What Is the Weighted Average Cost of Capital If:
(Round all your answers to two decimal places. If you want to enter the number 12.34%,
1. the company uses new debt, new preferred shares and just retained earnings?
2. the company uses new debt, new preferred shares and new common shares?
E. How much of the new capital projects can be funded without using new shareholders?