Solved: Newrock Manufacturing Inc has the following

target capital stru

Newrock Manufacturing Inc. has the following target capital structure

Debt ..............25%
Preferred ............ 20
Equity ............. 55
Investment bankers have advised the CFO that the company could raise up to $5 million in new
debt financing by issuing bonds at a 6.0% coupon rate; beyond that amount, new debt would
require a 7.0% coupon. Newrock’s 8.5% preferred stock, issued at a par value of $100,
currently sells for $112.50. There are 3 million shares of common stock outstanding on which
the firm paid an annual dividend of $2.00 recently. The stock currently trades at $36.00 per
share. Next year’s net income is projected at $14 million and management expects 6% growth
in the foreseeable future. Flotation costs are 6% on debt and 11% on common and preferred
stock. The marginal tax rate is 40%.
a. Calculate the WACC using the target capital structure and the cost of retained earnings for
the equity component.
b. Plot Newrock’s MCC identifying the levels of funding at which the first two breaks occur, and
calculate the WACCs after each break.
c. Newrock has identified the following capital projects for next year:

Projects A and B are mutually exclusive, as are Projects C and H. Plot the IOS and the MCC
and determine the ideal size of next year’s capitalprogram.

Newrock Manufacturing Inc has the following target capital stru

ANSWER
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