The company expects its dividends and earnings to continue to grow at a constant rate per year. The company expects to have $1.2 million of available retained earnings. Once the retained earnings have been exhausted, the firm can raise additional funds by selling new equity at $14.50 per share after flotation costs..
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1. Determine Highsky’s existing market value capital structure.
2. The company adjusts the cash-flows for flotation costs. Discuss the appropriateness of this approach
3. Calculate the after tax cost of each source of financing.
4. Discuss an alternative manner to calculate the Cost of Equity (Ordinary shares)
5. Discuss an alternative calculation of the growth factor used in the dividend growth model
6. Assuming that Highsky maintains this optimum market value capital structure, calculate the breaking points associated with each source of capital.
7. Using the breaking points developed determine each of the ranges of total new financing over which the company’s WACC remains constant.
8. Calculate the WACC for each range of total new financing.
9. Using your findings above with the Investment Opportunities Schedule (IOS), draw the company’s weighted marginal cost of capital (WMCC) function and IOS on the same set of total new financing or investment (x-axis) – WACC and IRR (y-axis) axes
10. Which, if any, of the available investments would you recommend the firm accept?
11. Explain your answer, concluding with a discussion of the accept reject decision on the marginal project.
12. Assuming that the specific financing costs do not change what effect would a shift to a more highly levered capital structure consisting of 60 per cent long-term debt, 20 per cent preference capital and 20 per cent ordinary equity have on your findings above? (Note: rework the relevant parts above using these capital structure weights) Get Finance homework help today
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