المحاسب الإداري المعتمد الجزء 2 B. Corporate Finance

Aldercrest: Costing the Capital for a Second Grow-Out Hall

Aldercrest Aquafarms

Question of 7 Aldercrest: Costing the Capital for a Second Grow-Out Hall

Aldercrest: Costing the Capital for a Second Grow-Out Hall Case-based question

الحالة

Aldercrest Aquafarms raises steelhead trout in indoor recirculating tanks and sells whole fish and fillets to regional grocery chains. The board has approved a second grow-out hall. This year's operating cash flow is committed to a prepayment under a multi-year feed contract, so the hall will be financed entirely with newly issued securities in the target proportions below; no retained earnings will be used for it.

Instrument	Terms of the new issue
Bonds	15-year, $1,000 face value, 6.8% annual coupon; sold at face value with no issuance costs
Cumulative preferred stock	$100 par; annual dividend $7.60 per share; perpetual and nonvoting; sold at $98.50 per share with issuance costs of $3.50 per share
Common stock	Market price $42.50 per share; dividend expected over the next 12 months (D1) $2.40 per share; dividends expected to grow at 4% a year indefinitely; issuance costs of $2.50 per new share

Target capital structure	Weight
Bonds	40%
Cumulative preferred stock	15%
Common stock	45%

Aldercrest's marginal income tax rate is 25%. Its effective (average) tax rate in last year's income statement was 15% because of a one-time research credit that will not recur. The CFO intends to use the resulting WACC as the minimum return the new hall must earn; the hall is judged to carry the same risk as Aldercrest's existing operations.

الافتراضات

Interest is deductible, and Aldercrest has enough taxable income to use each year's interest deduction in that year.
The bonds sell at face value with no issuance costs, so their pre-tax cost equals the 6.8% coupon rate.
The preferred stock's component cost is measured on net proceeds: annual dividend / (issue price - issuance cost per share).
Cost of new common equity uses the constant-growth dividend model on net proceeds: D1 / (market price - issuance cost per share) + g.
WACC uses the target weights shown, not the book or market values of existing capital.
Where a question changes one input, treat that change on its own with all other inputs as given (all else equal). Keep full precision in intermediate steps and round only as each question instructs.

Aldercrest's CFO proposes to use the WACC as the minimum acceptable return for the new hall. Which statement best describes what the WACC represents?

الإجابة The return Aldercrest's existing operations earned last year on total capital employed, since that shows what its capital can achieve. The current yield on Aldercrest's existing bonds plus a risk premium chosen by the board to compensate the shareholders who fund the hall. The weighted average of the after-tax cost of each source of new funds, with weights taken from Aldercrest's target financing mix. The pre-tax rates on the new bonds, preferred stock and common stock, weighted by the target financing mix.

At what after-tax rate should Aldercrest's new bonds enter the cost-of-capital calculation?

الإجابة 6.80% 5.78% 1.70% 5.10%

Select the TWO statements that describe disadvantages to Aldercrest of raising the equity for the hall by selling new common shares.

اختيار إجابتين. المحدد 0 / 2

الإجابة Selling new common shares would push equity above its 45% target weight and so raise the WACC for the hall. The $2.50 issuance cost reduces what Aldercrest nets per share, so new common equity costs more than equity from retained earnings would. Selling new common shares would raise Aldercrest's debt ratio and weaken its interest coverage. Aldercrest would be obliged to buy the new shares back at their issue price on a set future date, creating a refinancing need like the bonds' maturity. Investors may read a new share issue as a sign that management thinks the shares are overvalued, which can put downward pressure on the share price.

Select the TWO statements that correctly describe Aldercrest's proposed cumulative preferred stock.

اختيار إجابتين. المحدد 0 / 2

الإجابة Its dividends are tax-deductible, so its component cost is the dividend yield on the net proceeds multiplied by (1 - the tax rate). Its cost to Aldercrest exceeds the 7.6% dividend rate on par, because Aldercrest nets less than $100 for each share it sells. In a liquidation, its holders would be paid before the bondholders, because preferred claims rank ahead of all other long-term capital. With a fixed dividend and no maturity, its market price would fall if investors began to require a higher yield on similar shares. If Aldercrest skipped a preferred dividend, the holders could declare a default and demand immediate repayment of the $100 par.

Calculate Aldercrest's WACC for the new hall using the target weights, the after-tax cost of the bonds at the tax rate that applies to Aldercrest's interest deductions, and the issuance-cost-adjusted costs of the new preferred and new common stock. Keep full precision until the final step. Enter the WACC as a percentage number rounded to two decimal places, without the % sign (for example, enter 12.34 for 12.34%).

الإجابة percent

بـ 2 منازل عشرية.

Complete the analysis of how single changes would affect Aldercrest's cost of capital. Treat each change on its own, with all other inputs as given. If the target weights changed to 30% bonds, 15% preferred stock and 55% common stock, with every component cost unchanged, the WACC would Lower bond weight: WACC . If a change in tax law raised every income tax rate that applies to Aldercrest by five percentage points, the after-tax cost of the bonds would Higher tax rate: after-tax cost of bonds , the cost of the preferred stock would Higher tax rate: cost of preferred stock , and the WACC would Higher tax rate: WACC . If the share price rose to $47.50 while D1, g and the $2.50 per-share issuance cost stayed the same, the cost of new common equity would Higher share price: cost of new common equity .

For each statement, choose the instrument in Aldercrest's financing plan that it describes best. (1) Holders have the residual claim on earnings and assets and therefore require the highest return of the three: Residual claim . (2) Dividends skipped in any year accumulate and must be paid in full before any dividend is paid on common shares: Arrears before common dividends . (3) The regular interest or dividend payments made to these holders reduce Aldercrest's taxable income: Deductible payments . (4) The full face amount must be repaid on a stated date: Stated repayment date . (5) Its payout is fixed by the terms of the issue, yet it is reported as equity rather than as a liability: Fixed payout, reported as equity . (6) A preemptive right lets existing holders buy a proportionate share of any new issue before outside investors: Preemptive right . (7) Holders normally vote to elect the board of directors: Votes for directors .

تظهر الدرجات والإجابات الصحيحة والشروح فور تسليم الإجابات. ولا يحصل السؤال غير المُجاب على أي درجة.

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