Scope City B 
Scope City, Incorporates (B)
FIN 411
1. The historical WACC is a calculation of firm’s cost of capital over past years. It shows what returns were generated over those years, and shows how the capital market assessed the firm in those past years. The marginal cost of capital tells us the cost needed to raise the last dollar of capital. It is the minimum acceptable rate of return. In other words, it shows the cost of future financing. The historical WACC and MCC are very important for investors in order to evaluate firm’s prospects, as well as for managers.
2. The marginal cost of capital is used in evaluation of profitability of the firm’s new projects or investments. The MCC also tells us how capital market sees the value and riskiness of the firm.
3. Generally an increase in interest rates leads to higher required rates of return on debt and equity. When there is a general decline in stock prices, the costs of equity increase, as well as marginal costs of capital. An increase in investor’s risk aversion leads to stock prices decline and an increase in bond prices when investors substitute bonds for equity. In that case the cost of debt may decline.
4.
SCI can use their actual capital structure:
$11,250 - $1500 = $9,750 $2,250 / $9,750 = 23.08% debt
100%-23.08% = 76.92% equity
Dividend payout ration 32%
Historical average return on common stock 16%
D1= EPS x (DPR) x (1+ g) D1 = $4.56 x (0.32) x (1.16) = $1.69
Tax rate – 30%
New bond issue – 6.75% coupon rate
Coupon rate after taxes – 4.73%
Expected stock price - $22.75
$1.69 / $22.75 + 0.16 = 23.43%
MCC = 0.0473 x 0.2308 + 0.2343 x 0.7692 = 19.11%
Investment banker: 45% - debt
55% - common equity
MCC = 0.0473 x 0.45 + 0.2343 x 0.55 = 15.02%
The board favored:
60% - debt
40% - equity
MCC = 0.0473 x 0.60 + 0.2343 x 0.40 = 12.21%
Optimal capital structure is an ideal balance between debt and equity that minimizes cost of capital and maximizes stock
FIN 411
1. The historical WACC is a calculation of firm’s cost of capital over past years. It shows what returns were generated over those years, and shows how the capital market assessed the firm in those past years. The marginal cost of capital tells us the cost needed to raise the last dollar of capital. It is the minimum acceptable rate of return. In other words, it shows the cost of future financing. The historical WACC and MCC are very important for investors in order to evaluate firm’s prospects, as well as for managers.
2. The marginal cost of capital is used in evaluation of profitability of the firm’s new projects or investments. The MCC also tells us how capital market sees the value and riskiness of the firm.
3. Generally an increase in interest rates leads to higher required rates of return on debt and equity. When there is a general decline in stock prices, the costs of equity increase, as well as marginal costs of capital. An increase in investor’s risk aversion leads to stock prices decline and an increase in bond prices when investors substitute bonds for equity. In that case the cost of debt may decline.
4.
SCI can use their actual capital structure:
$11,250 - $1500 = $9,750 $2,250 / $9,750 = 23.08% debt
100%-23.08% = 76.92% equity
Dividend payout ration 32%
Historical average return on common stock 16%
D1= EPS x (DPR) x (1+ g) D1 = $4.56 x (0.32) x (1.16) = $1.69
Tax rate – 30%
New bond issue – 6.75% coupon rate
Coupon rate after taxes – 4.73%
Expected stock price - $22.75
$1.69 / $22.75 + 0.16 = 23.43%
MCC = 0.0473 x 0.2308 + 0.2343 x 0.7692 = 19.11%
Investment banker: 45% - debt
55% - common equity
MCC = 0.0473 x 0.45 + 0.2343 x 0.55 = 15.02%
The board favored:
60% - debt
40% - equity
MCC = 0.0473 x 0.60 + 0.2343 x 0.40 = 12.21%
Optimal capital structure is an ideal balance between debt and equity that minimizes cost of capital and maximizes stock