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proposing a new venture, to branch out into figurine animals and cartoon characters but this will require new equipment and a capital outlay.

You work for the Berea Amalgamated Products Company that produces coloring books, velvet paintings and other fine arts.


You are proposing a new venture, to branch out into figurine animals and cartoon characters but this will require new equipment and a capital outlay.

You need to explore the financials before further researching unto a complete recommendation relative to this proposed venture.

Pertinent financial information is below briefly stated:

Cash2,000,000Accounts Payable and Accruals18,000,000
Accounts Receivable28,000,000Notes Payable40,000,000
Inventories42,000,000Long-Term Debt60,000,000
Preferred Stock10,000,000
Net Fixed Assets133,000,000Common Stock77,000,000
Total Assets205,000,000Total Claims205,000,000


Last year’s sales were $225,000,000.

The company has 60,000 bonds (par value $1,000.; 30-year life) with 15 years until maturity. The bonds carry a 10 percent annual coupon, and are currently selling for $874.78.

You also have 100,000 shares of $100 par, 9% dividend perpetual preferred stock outstanding. The current market price is $90.00. Any new issues of preferred stock would incur a $3.00 per share flotation cost.

The company has 10 million shares of common stock outstanding with a currently price of $14.00 per share. The stock exhibits a constant growth rate of 10 percent. The last dividend (D0) was $.80. New stock could be sold with 15% flotation costs.

The risk-free rate is currently 6 percent, and the rate of return on the stock market as a whole is 14 percent. Your stock’s beta is 1.22.

Stockholders require a risk premium of 5 percent above the return on the firms bonds.

The firm expects to have additional retained earnings of $10 million in the coming year, and expects depreciation expenses of $35 million.

Your firm does not use notes payable for long-term financing.

The firm considers its current market value capital structure to be optimal, and wishes to maintain that structure. (Hint: Examine the market value of the firm’s capital structure, rather than its book value.)

The firm is currently using its assets at capacity.

The firm’s management requires a 2 percent adjustment to the cost of capital for risky projects.

Your firm’s federal + state marginal tax rate is 40%.

Your firm’s dividend payout ratio is 50 percent, and net profit margin was 8.89 percent.


PROJECT DELIVERABLES: Steps to WACC for the Optimal Capital Structure

Find the costs (rate of return under current market conditions) of the following individual capital components:


(ITEM #1)-Long-term debt, Bonds. [Hint: PV=-$874.78 (current selling price of Bonds), FV = $1000, PMT=$100, n=15 solve for i]. This is a calculator problem and if you follow the hints you will find the effective rate (see textbook appendix 10B, pages 337: Bond Valuation)

ITEM #2)-New Preferred stock

ITEM #3)-New common stock


(ITEM #4)-Compute the current Total Value of the Firm depicting its long-term elements of the capital structure.


(ITEM #5)-Determine the target percentages for the optimal capital structure: i.e. the weighted average cost of capital (WACC) using current values
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