Time Value of Money

Homework 3FIN 336 Spring 2015Name: _____________________

Due: Tuesday, Feb 3rdPlease watch the videos WACC by Bionic Turtle (9:09), Cost of Debt Analyzed w/ Hamilton Lin (5:05), and WACC Applied w/ Hamilton Lin (7:31) Using the information from the videos and from our class lectures, answer the questions below (show your work).The Okefonokee Real Deal Company is financed with $600 million of the common stock, $500 millionof debt, and $100 million of preferred stock. They find this capital structure to be optimal.

Their common stock is currently selling for $25 a share. The last (annual) common stock dividend was

$2.50 and dividends are growing at a constant 5% rate. The company currently has $140 million of retained earnings available for future projects. New common stock can be raised but it will cost 2.5% more than the existing common stock (retained earnings). Preferred stock has a price of $100, a dividend of $10, and the cost of preferred stock will not change. The company can raise $120 million of new debt with a before tax cost of 8% and another $100 million of additional debt with a before tax cost of 10% (assume zero flotation costs). The tax rate is 40%.

Plans for future expansion will require raising $400 million of new capital.

a. What is the cost of retained earnings?b. What is the cost of new common equity?

c. What is the cost of preferred stock?d. What is the WACC of the first dollar raised of the $400 million of new capital?

e. What is the first breakpoint and what source of capital will run out first?

f. What is the second breakpoint and what source will run out second?

g. What is the WACC of the last dollar raised?

Please rate the video on a scale of 1-5 (1=horrible, 5=perfect)

WACC by Bionic Turtle (9:09)

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Cost of Debt Analyzed w/ Hamilton Lin (5:05)

_________________WACC Applied w/ Hamilton Lin (7:31)

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