Maurice Tutor

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    Argosy University/ Phoniex University/
    Nov-2005 - Oct-2011

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    Phoniex University
    Oct-2001 - Nov-2016

Category > Management Posted 05 May 2018 My Price 6.00

Rockwood Enterprises

Rockwood Enterprises is currently an all equity firm and has just announced plans to expand its current business. In order to fund this expansion, Rockwood will need to raise $100 million in new capital. After the expansion, Rockwood is expected to produce earnings before interest and taxes of $50 million per year in perpetuity. Rockwood has already announced the planned expansion, but has not yet determined how best to fund the expansion. Rockwood currently has 16 million shares outstanding and following the expansion announcement these shares are trading at $25 per share (hence, any positive NPV is already reflected into Rockwood's current stock price). Rockwood has the ability to borrow at a rate of 5% or to issue new equity at $25 per share.

 

1/- If Rockwood finances their expansion by issuing new stock, what will Rockwood's cost of equity capital be? Show mathematically.


2/- If Rockwood finances their expansion by issuing $100 million in debt at 5%, what will Rockwood's cost of equity capital be? Show mathematically.


3/- Show mathematically that the stock price of Rockwood does not depend on whether they issue new stock or borrow to fund their expansion?

Answers

Maurice Tutor
(5)
Status NEW Posted 05 May 2018 08:05 PM My Price 6.00

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