Angie Watts 1
[Title Here, up to 12 Words, on One to Two Lines]Wheel Industries Consultant Report
Argosy University
Professor Charlie Merritt Financial Management | FIN401 A02 Company Information
Wheel Industries is considering a three-year expansion project, Project A. The project requires an initial investment of $1.5 million. The project will use the straight-line depreciation method. The project has no salvage value. It is estimated that the project will generate additional revenues of $1.2 million per year before tax and has additional annual costs of $600,000. The Marginal Tax rate is 35%. Wheel has just paid a dividend of $2.50 per share. The dividends are expected to grow at a constant rate of six percent per year forever. If the stock is currently selling for $50 per share with a 10% flotation cost, what is the cost of new equity for the firm? What are the advantages and disadvantages of using this type of financing for the firm? Cash Flow
D= expected dividend per share
P= current market price of share
+= expected growth rate in dividend (2.50*1.06)/ (50*90%) +.06= 11.89%
Advantages Equity Financing:
Debt financing allows you to pay for new buildings, equipment and other assets used to grow your business before you earn the necessary funds. This can be a great way to pursue an aggressive growth strategy, especially if you have access to low interest rates. Closely related is the advantage of paying off your debt in installments over a period of time. Relative to equity financing, you also benefit by not relinquishing any ownership or control of the business (Kokemuller, 2014)
Argosy University
Professor Charlie Merritt Financial Management | FIN401 A02 Company Information
Wheel Industries is considering a three-year expansion project, Project A. The project requires an initial investment of $1.5 million. The project will use the straight-line depreciation method. The project has no salvage value. It is estimated that the project will generate additional revenues of $1.2 million per year before tax and has additional annual costs of $600,000. The Marginal Tax rate is 35%. Wheel has just paid a dividend of $2.50 per share. The dividends are expected to grow at a constant rate of six percent per year forever. If the stock is currently selling for $50 per share with a 10% flotation cost, what is the cost of new equity for the firm? What are the advantages and disadvantages of using this type of financing for the firm? Cash Flow
D= expected dividend per share
P= current market price of share
+= expected growth rate in dividend (2.50*1.06)/ (50*90%) +.06= 11.89%
Advantages Equity Financing:
Debt financing allows you to pay for new buildings, equipment and other assets used to grow your business before you earn the necessary funds. This can be a great way to pursue an aggressive growth strategy, especially if you have access to low interest rates. Closely related is the advantage of paying off your debt in installments over a period of time. Relative to equity financing, you also benefit by not relinquishing any ownership or control of the business (Kokemuller, 2014)
References: Block, S. (2009). Foundations of Financial Management. Vital Source bookshelf version Retrieved from http://digitalbookshelf.argosy.edu/books/007-737696X/id/ch01 Neil Kokemuller (2014). The Advantages and Disadvantages of Debt and Equity Financing. Retrieved from http://smallbusiness.chron.com/advantages-disadvantages-debt-equity-financing-55504.html Unknown (2014). WAAC and Capital Budgeting. Retrieved from http://www.ask.com/question/wacc-and-capital-budgeting Cromwell (2014). Description of Capital Budgeting. Retrieved from http://smallbusiness.chron.com/description-capital-budgeting-15496.html