You have just been hired as the CFO (chief financial officer) of D.W.O.T.T. Inc. Congratulations!!! I am so super proud of you! Now get to work!
You have lots to do because the last guy was lazy and good for nothing. Don’t worry, you have his face on a dart board in your office. The president of the DWOTT has given you a fairly large ‘to do’ list and wants it ASAP. So you load up on Monster Energy drinks and coffee and settle in to work. It’s ok though, because you LOVE this stuff. Seriously. You do. Now that you are all jacked up on caffeine-let’s get it done!
First on the president’s list is an evaluation of where the firm is at the present. He has provided you with all the information you need to find the answers he wants. For starters, the capital structure for the past year of operations is:
Mortgage bonds $2,000
Debentures 1,500
Retained earnings 500
Answer: _________________________
The president informed you that DWOTT has chosen to raise capital by issuing stocks and bonds in the ratio of 6.5:3.5.
He also wants to know the WACC and has given you the following information about your capital budgeting:
The 20 year $1000 par value mortgage bonds were sold at $952.67 and pay 8%. They had a $47.67 flotation cost.
Answer: _________________________
The 15 year $500 par value debentures were sold at $486.50 and pay 6%. They had a $26.50 flotation cost.
Answer: _________________________
DWOTT paid a dividend of $.80 last year and expects them to grow 15% next year and into the foreseeable future. The stock currently trades at $36.70.
Answer: _________________________
Answer: _________________________
Now the president is starting to get on your nerves. But, whaddayagonnado? He is the president. You just wish he wasn’t so demanding. Nevertheless, you press on. He has informed you that you need to aid in a decision regarding a new facility. There are 3 mutually exclusive locations being considered each with it’s own startup cost and projected cash flows as shown below:
| Timbuktu | Neverland | Middle Earth | |
| Cost | $3,600 | $8,750 | $6,500 |
| Year 1 CF | $0 | $4,000 | $2,000 |
| Year 2 CF | 0 | 4,000 | 2,000 |
| Year 3 CF | 0 | 1,500 | 2,000 |
| Year 4 CF | 0 | 0 | 2,000 |
| Year 5 CF | $8,500 | 3,000 | 3,000 |
The president has asked for a thorough analysis. Keeping in mind DWOTT’scost of capital (use WACC above), what decision should be made regarding the projects above using each of the following tools(assume a 6% reinvestment rate):
Choice & Why?
Choice & Why?
Choice & Why?
Choice & Why?
Choice & Why?
Now that you have decided which location you will move forward with, you must determine how you will raise the capital. You have done some research and come up with 3 options:
PREFERRED STOCK: DWOTT can sell preferred stock for $21 per share. The preferred stock pays an annual dividend of 3.5% based on a par value of $100. Flotation costs associated with the sale of preferred stock equal $1.25 per share. The company’s marginal tax rate is 35%.
Answer: _________________________
COMMON STOCK: Another option available toDWOTTis to sell common stock for $27 per share and its investors require a 17% return. However, the administrative or flotation costs associated with selling the stock amount to $2.70 per share.
Answer: _________________________
BONDS: Finally, you could finance the new location by issuing new 10-year, $1,000 par, 9% annual coupon bonds. The market price of the bonds is $625 each. The flotation expense on the new bonds will be $50 per bond. DWOTTis in the 35% tax bracket.
Answer: _________________________
