Prior to beginning work on this discussion, read Chapters 12 and 13 of your textbook, and test your knowledge in the MindTap Practice Chapter 12 Problem 8 and Chapter 12 Problem 10. Although not required, it is recommended that you also review the chapter videos and flashcards available in the recommended resources section of your course.
You have been hired as a Financial Analyst by your chosen company. Your assignment is to estimate the firm’s cost of capital for a new expansion project. To get started, The Director of Finance has asked you to gather the following information in order to complete your estimates for the cost or capital. Use your chosen company’s most recent annual financial statements and the firm’s marginal tax rate to compute any after-tax costs, ensuring you show your work for all computations.
In your paper,
Compute the component cost for the current outstanding bonds and long-term debt. (You do not need to calculate short term debt, as the firm does not use short-term debt on a permanent basis.)
Compute the component cost for the firm’s preferred stock, if applicable.
Compute the component cost for the firm’s common stock at its current selling price.
Compute the firm’s current target capital structure.
Compute your chosen company’s weighted average cost of capital.
Determine the area of your analysis that has the greatest potential for error.
Identify the reason for the potential for error.
Identify what could be done, if anything, to improve computations in these areas.
Recommend an optimal capital structure to the finance director.
Discuss the pros and cons of your recommendations using credible sources to support your analysis
The Firm’s Cost of Capital paper