0% Plagiarism Guaranteed & Custom Written

What are the total flotation costs the firm will incur to raise the needed $40 million?How should the flotation costs be incorporated into the analysis of the $40 million investment the firm plans to make? Recalculate the WACC with flotation costs.

01 / 10 / 2021 Assignment

This paper circulates around the core theme of What are the total flotation costs the firm will incur to raise the needed $40 million?How should the flotation costs be incorporated into the analysis of the $40 million investment the firm plans to make? Recalculate the WACC with flotation costs. together with its essential aspects. It has been reviewed and purchased by the majority of students thus, this paper is rated 4.8 out of 5 points by the students. In addition to this, the price of this paper commences from £ 99. To get this paper written from the scratch, order this assignment now. 100% confidential, 100% plagiarism-free.

The
Nealon Manufacturing Company is in the midst of negotiations to acquire a plant
in Fargo, North Dakota. The company CFO, James Nealon, is the son of the
founder and CEO of the company and heir-apparent to the CEO position, so he is
very concerned about making such a large commitment of money to the new plant.
The cost of the purchase is $40 million, which is roughly one-half the size of
the company today.

To
begin his analysis, James has launched the firm’s first ever cost-of-capital
estimation. The company’s current balance sheet, restated to reflect market
values, has been converted to percentages as follows:

Nealon,
Inc., Balance Sheet—2013


Type
of Financing

Percentage of Future Financing

Bonds (8%, $1,000 par, 30-year
maturity)

38%

Preferred stock (5,000 shares outstanding, $50 par, $1.50
dividend)

15%

Common
stock

47%

Total

100%

The
company paid dividends to its common stockholders of $2.50 per share last year,
and the projected rate of annual growth in dividends is 6 percent per year for
the indefinite future. Nealon’s common stock trades over the counter and has a
current market price of $35 per share. In addition, the firm’s bonds have an AA
rating. Moreover, AA bonds are currently yielding 7 percent. The preferred
stock has a current market price of $19 per share.

a.
If the firm is in a 34
percent tax bracket, what is the weighted average cost of capital (i.e., firm
WACC)?

b. In
the analysis done so far we have not considered the effects of flotation costs.
Assume now that Nealon is raising a total of $40 million using the above
financing mix. New debt financing will require that the firm pay 50 basis
points (i.e., one-half a percent) in issue costs, the sale of preferred stock
will require the firm to pay 200 basis points in flotation costs, and the
common stock issue will require flotation costs of 500 basis points.

i. What
are the total flotation costs the firm will incur to raise the needed $40
million?

ii.
How should the flotation
costs be incorporated into the analysis of the $40 million investment the firm
plans to make? Recalculate the WACC with flotation costs.



International House, 12 Constance Street, London, United Kingdom,
E16 2DQ

Company # 11483120

Benefits You Get

  • Free Turnitin Report
  • Unlimited Revisions
  • Installment Plan
  • 24/7 Customer Support
  • Plagiarism Free Guarantee
  • 100% Confidentiality
  • 100% Satisfaction Guarantee
  • 100% Money-Back Guarantee
  • On-Time Delivery Guarantee
FLAT 50% OFF ON EVERY ORDER. Use "FLAT50" as your promo code during checkout