BUS 4404 UOPEOPLE New Stock or Bond Issue Exercises
Description
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Discussion Assignment
Describe the process by which new stock (or a new bond series) is issued in order for a company to raise capital.
Written Assignment
The Expanding Capital Corporation has a current capital structure of $15 million in secured bonds paying 6.5% annual interest, $10 million in preferred stock with a par value of $50 per share and an annual dividend of $3.80 per share, and common stock with a book value of $75 million. It is about to issue new debentures in the amount of $10 million paying 7.5% annual interest. Its CFO says its marginal tax rate is 30% and its cost of common equity capital is 12%. Calculate the company’s Weighted Average Costs of Capital for the following:
Before the new bond issue
After the new bond issue
Learning Journal
In Week #3, we studied capital budgeting and the use of an implied interest rate (cost of capital) is key in the net present value (NPV) model. In Week #4 and this week, we studied how to compute the cost of capital for an enterprise. Please write at least three well composed paragraphs that discuss the connection between capital budgeting decisions and the enterprise’s cost of capital. Would an enterprise ever decide to embark on a project whose rate of return would be less than its cost of capital? Why or why not?
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