ASSIGNMENT-1

FIN201

Submitted To:
Md. Al-Mamun
Senior Lecturer
Dept. of Business Administration. EWU.

Submitted By:
Mohammad Shaniaz Islam
2009-1-10-102
Sec-03

Date of Submission: 10-03-2011

Step1:

• Calculation of cost of Retained Earning (Internal Equity up to 100M)

Kre= D1 / (P-f) + g Where D1 = D0 (1 + g)

g = (D2010 / D2005) 1/n – 1
= (5.25 / 3.05) 1/5 - 1
= 0.1147

Kre= [D0 ( 1 + g ) / (P-f) ] + g

= [5.25 (1 + 0.1147) / (55-0)] + 0.1147 = 0.1064 or 10.64%

• Calculation of cost of Common Stock :(Less than or Equal to 100M)

(Floatation Cost is 6.75%)

Kre= [D0 ( 1 + g ) / (P-f) ] + g

= [5.25 (1 + 0.1147) / (55 - 3.71)] + 0.1147 = 0.2287 or 22.87%

Note: floatation cost =55*6.75% = 3.71

• Calculation of cost of Common Stock :(More than 100M)

(Floatation Cost is 7.15%)

Kre= [D0 ( 1 + g ) / (P-f) ] + g

= [5.25 (1 + 0.1147) / (55 – 3.93)] + 0.1147 = 0.2293 or 22.93%

Note: floatation cost =55*7.15% = 3.93

• Calculation of cost of Preferred Stock :(Less than or Equal to 150M)

(Floatation Cost is 4.25%)

Kp = [Dp + (RV- MV) / n] / [(RV + MV) / 2]

= [9.25 + (100- 86.17) / 10] / [(100 + 86.17) / 2]
=0.1142 or 11.42%
Note: floatation cost= 90*4.25% = 3.82
MV = 90-3.82= 86.17

• Calculation of cost of Preferred Stock (More than 150M)

(Floatation Cost is 4.75%)

Kp = [Dp + (RV- MV) / n] / [(RV + MV) / 2]

= [9.25 + (100- 85.72) / 10] / [(100 + 85.72) / 2]
=0.1150 or 11.5%

Note: floatation cost = 90*4.75% = 4.275

MV = 90- 4.275= 85.72

• Calculation of cost of Bond :(Less than or Equal to 100M)

Kd = [[ Int + (RV- MV) / n] / [(RV + MV) / 2] ] * (1- tax rate)

= [[95 + (1000- 1125) / 10] / [(1000+ 1125) / 2]]* (1- 0.4)
=0.04658 or 4.66%

• Calculation of cost of Bond :(More than 100M)

Kd = [ [ Int + (RV- MV) / n] / [(RV + MV) / 2] ] * (1- tax rate)

= [ [ 95 + (1000- 1125) / 10] / [(1000+ 1125) / 2] ]* (1- 0.4)
=0.04658 or 4.66%
Cost Structure:
Sources and Financing Level Cost
Retained Earning ( up to 100M ) 10.64%
Common Stock ( up to 100M ) 22.87%
Common Stock ( more than 100M ) 22.93%
Preferred Stock ( up to 150 M ) 11.42%
Preferred Stock (more than 150M ) 11.5%
Bond ( up to 100M ) 4.66%
Bond ( more than 100M ) 5.7%

Step 2 :
Calculate the Break point

Preferred stock = Amount of fund level / percentage of fund= 150/.40= $375M

Debt = Amount of fund level / percentage of fund= 100/.20=$500M
Retained Earning= Amount of fund level / percentage of fund= 100/.40=$250M
Common Stock = Amount of fund level / percentage of fund= (100+100)/.40=500M

Step 3:
Deciding the financing levels using break points:

Financing level
From 0 up to 250M
More than 250 up to 375M
More than 375 up to 500M
More than 500M

Step 4 :
Calculating WMCC for each financing level:

• From 0 M up to 250M-

Sources Weight Amount After tax cost Weighted cost

Debt .20 50 .0466 .00932
P/S .40 100 .1142 .04568
C/S .40 100 .1064 .04256
Total 1.00 250M WMCC= .09756
 • From 250 M up to 375M-

Sources Weight Amount After tax cost Weighted cost

Debt .20 75 .0466 .00932
P/S .40 150 .1142 .04568
C/S .40 150 .2287 .09148
Total 1.00 375M WMCC= .14648

• From 375 M up to 500M-

Sources Weight Amount After tax cost Weighted cost

Debt .20 100 .0466 .00932
P/S .40 200 .115 .04600
C/S .40 200 .2287 .09148
Total 1.00 500M WMCC= .14680

• More than 500M (For Example 800M)-

Sources Weight Amount After tax cost Weighted cost

Debt .20 160 .057 .01140
P/S .40 320 .115 .04600
C/S .40 320 .2293 .09172
Total 1.00 800M WMCC= .14912

Financing Level WMCC

From 0 up to 250M 0.09756
More than 250 to 375M 0.14648
More than 375 to 500M 0.14680
More than 500M 0.14912
Step 5 :
Drawing IOS & WMCC Schedule to Decide Investment & Financing Mix-

Project IRR Amount Required Ranking

A 14.5% 100M 5th
B 15.5% 200M 4th
C 16.25% 100M 2nd
D 16.75% 150M 1st
E 16.0% 200M 3rd

Now Company should take first D then C then E etc. Now if the company wants to take
D then it must invest 150M, but if it wants to take C then it must invest 250M (First takes
D then C). Similarly if it wants to take project A then it must invest total 750 M.

So project B C D E should be taken and the total investment will be 655 M.