Eco Plastics Company
Since its inception, Eco Plastics Company has been revolutionizing plastic and trying to do its part to save the environment. Eoc s founder, Marion Cosby, developed a biodegradable plastic that her company is marketing to manufacturing companies throughout the southeastern United States. After operating as a private company for six years, Eco went public in 2009 and is listed on the Nasdaq stock exchange.
As the chief financial officer of a young company with lots of investment opportunities. Eco s CFO closely monitors the firm s cost of capital. The CEO keeps tabs on each of the individual cost of Eco s three main financing sources: long-term debt, preferred stock, and common stock. The target capital structure for ECO is given by the weights in the following table:
Source of capital
Common stock equity
As the present time, Eco can raise debt by selling 20-year bonds with a $1,000 par value and a 10.5% annual coupon interest rate. Eco s corporate tax rate is 40%, and its bonds generally require an average discount of $45 per bond and floatation cost of $32 per bound when being sold. Eco s outstanding preferred stock pays a 9% dividend and has a $95-per-shar par value. The cost of issuing and selling addional preferred stock is expected to be $7 per share. Because Eco is a young firm that requires lots of cash to grow it does not currently pay a dividend to common stock holders. To track the cost of common stock the CFO uses the capital asset pricing model (CAPM). The CFO and the firm s investment advisors believe that the appropriate risk-free rate is 4% and that the market s expected return equals 13%. Using data from 2009 through 2012, Eco s CFO estimates the firm s beta to be 1.3.
Although Eco s current target capital structure includes 20% preferred stock, the company is considering using debt financing to retire the outstanding preferred stock, thus shifting their target capital structure to 50% long-term debt and 50% common stock. If Eco shifts its capital mix from preferred stock to debt, its financial advisors expects its beta to increase to 1.5.
a. Calculate Eco s current after-tax cost of long-term debt.
b. Calculate Eco s current cost of preferred stock.
c. Calculate Eco s current cost of common stock.
d. Calculate Eco s current weighted average cost capital.
e. (1) Assuming that the debt financing costs do not change, what effect would a shift to a more highly leveraged capital structure consisting of 50% long-term debt, 0% preferred stock, and 50% common stock have on the risk premium for Eco s common stock? What would be Eco s new cost of common equity?
(2) What would be Eco s new weighted average cost of capital?
(3) Which capital structure-the original one or this one-seems better? Why?
Delivering a high-quality product at a reasonable price is not enough anymore.
That’s why we have developed 5 beneficial guarantees that will make your experience with our service enjoyable, easy, and safe.
You have to be 100% sure of the quality of your product to give a money-back guarantee. This describes us perfectly. Make sure that this guarantee is totally transparent.Read more
Each paper is composed from scratch, according to your instructions. It is then checked by our plagiarism-detection software. There is no gap where plagiarism could squeeze in.Read more
Thanks to our free revisions, there is no way for you to be unsatisfied. We will work on your paper until you are completely happy with the result.Read more
Your email is safe, as we store it according to international data protection rules. Your bank details are secure, as we use only reliable payment systems.Read more
By sending us your money, you buy the service we provide. Check out our terms and conditions if you prefer business talks to be laid out in official language.Read more