the cost of common stock
FIN470 CASES IN FINANCIAL MANAGEMENT
PRINCE SULTAN UNIVERSITY-COLLEGE FOR WOMEN
COLLEGE OF BUSINESS AND ADMINISTRATION
ACADEMIC YEAR 2013/2014
CASE STUDY (15%) QUESTION
Students are required to form a group of THREE TO FOUR (3-4) members and register their grouping with their respective class representative (CR) by Week 2. Lecturer’s approval must be obtained if there is any change in the number of students due to withdrawal from the course. The deadline for written assignment submission is set in Week 11 on the 17 November 2013 during the class hour.
CASE STUDY:
Integrative Case 1: Eco Plastics Company
Since its inception, Eco Plastics Company has been revolutionizing plastic and trying to do its part to save the environment. Eco’s founder, Marion Cosby, developed a biodegradable plastic that her company is marketing to manufacturing companies throughout the southeastern United States. After operating as a private company for six years, Eco went public in 2009 and is listed on the Nasdaq Stock Exchange.
As the chief financial officer of a young company with lots of investment opportunities, Eco’s CFO closely monitor the firm’s cost of capital. The CFO keeps tabs on each of the individual costs of Eco’s three main financing sources: long-term debt, preferred stock, and common stock. The target capital structure for Eco is given by the weights in the following table:
Source of capital Weight
Long-term debt 30%
Preferred stock 20%
Common stock equity 50%
Total 100%
At the present time, Eco can raise debt by selling 20-year bonds with a $1,000 par value and a 10.5% annual coupon interest rate. Eco’s corporate tax rate is 40%, and its bonds generally require an average discount of $45 per bond and floatation costs of $32 per bond when being sold. Eco’s outstanding preferred stocks a 9% dividend and has a $95-per share par value. The cost of issuing and selling additional preferred
PRINCE SULTAN UNIVERSITY-COLLEGE FOR WOMEN
COLLEGE OF BUSINESS AND ADMINISTRATION
ACADEMIC YEAR 2013/2014
CASE STUDY (15%) QUESTION
Students are required to form a group of THREE TO FOUR (3-4) members and register their grouping with their respective class representative (CR) by Week 2. Lecturer’s approval must be obtained if there is any change in the number of students due to withdrawal from the course. The deadline for written assignment submission is set in Week 11 on the 17 November 2013 during the class hour.
CASE STUDY:
Integrative Case 1: Eco Plastics Company
Since its inception, Eco Plastics Company has been revolutionizing plastic and trying to do its part to save the environment. Eco’s founder, Marion Cosby, developed a biodegradable plastic that her company is marketing to manufacturing companies throughout the southeastern United States. After operating as a private company for six years, Eco went public in 2009 and is listed on the Nasdaq Stock Exchange.
As the chief financial officer of a young company with lots of investment opportunities, Eco’s CFO closely monitor the firm’s cost of capital. The CFO keeps tabs on each of the individual costs of Eco’s three main financing sources: long-term debt, preferred stock, and common stock. The target capital structure for Eco is given by the weights in the following table:
Source of capital Weight
Long-term debt 30%
Preferred stock 20%
Common stock equity 50%
Total 100%
At the present time, Eco can raise debt by selling 20-year bonds with a $1,000 par value and a 10.5% annual coupon interest rate. Eco’s corporate tax rate is 40%, and its bonds generally require an average discount of $45 per bond and floatation costs of $32 per bond when being sold. Eco’s outstanding preferred stocks a 9% dividend and has a $95-per share par value. The cost of issuing and selling additional preferred