What are the total flotation costs the fir m will incur to raise the needed $40 million?

Show more The Nealon Manufacturing Company is in the midst of negotiations to acquire a plant in Fargo North Dakota. The company CFO James Nealon is the son of the founder and CEO of the company and heir -apparent to the CEO position so he is very concerned about making such a large commitment of money to the new plant. The cost of the purchase is $40 million which is roughly one -half the size of the company today. To begin his analysis James has launched the firms first ever cost -of capital estimation. The companys current balance sheet restated to reflect market values has been converted to percentages as follows: Nealon Inc. Balance Sheet2013 Type of Financing Percentage of Future Financing Bonds (8% $1000 par 30 year maturity) 38% Preferred stock (5000 shares outstanding $50 par $1.50 dividend) 15% Common stock 47% Total 100% The company paid dividends to its common stockholders of $2.50 per share last year and the projected rate of annual growth in dividends is 6 percent per year for the indefinite future. Nealons common stock trades over the counter and has a current market price of $35 per share. In addition the firms bonds have an AA rating. Moreover AA bonds are currently yield ing 7 percent. The preferred stock has a current market price of $19 per share. FIN325 / Corporate Finance Assignment #2 a. If the firm is in a 34 percent tax bracket what is the weighted average cost of capital (i.e. firm WACC)? b. In the analysis done so far we have not considered the effects of flotation costs. Assume now that Nealon is raising a total of $40 million using the above financing mix. New debt financing will require that the firm pay 50 basis points (i.e. o ne -half a percent) in issue costs the sale of preferred stock will require the firm t o pay 200 basis points in flotation costs and the common stock issue will require flotation costs of 500 basis points. i. What are the total flotation costs the fir m will incur to raise the needed $40 million? ii. How should the flotation costs be incorporated into the analysis of the $40 million investment the firm plans to make? Please show work in excel. As I am really trying to see how the work is done. Thank you Show less

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