Datos del caso

n = 20
Annual Coupon Int rate & PMT = 10.5 -> 0.105 * 1000 = $105.00
Par value = $1000.00
Tax Rate = 40%
Avg discount per bond = $45.00
Flotation Cost = $32.00
Dividend on prefered stock = 9%
Per-share par value = $95.00
Flotation cost per share = $7.00
Risk free rate = 4%
Market expected return = 13%
β = 1.3
wx = 20% Preferred stock
wy = 30% Long term dept
wz = 50% Common stock

a. Calculate Eco’s current after tax cost of long-term debt.

Net proceeds = $1000 – $45 – $32 = $923

(105+(1000 -923)/20) ÷ (923+1000)/2 = 0.1132 = 11.32%

11.32% x (1 – 0.40) = 0.0679 = 6.79%

b. Calculate Eco’s current cost of preferred stock.

Dividend: 0.09 x 95 = $8.55

Net proceeds: 95 – 7 = $88.00

Preferred stock cost: rp = 8.55 / 88 = 0.09715 = 9.72%

c. Calculate Eco’s current cost of common stock.

Rs =0.04 + (1.3*(0.13 – 0.04)) = 0.1570 = 15.70%

d. Calculate Eco’s current weighted average cost capital.

Ra = (0.30*0.0679) + (0.20*0.0972) + (0.50*0.1570) = 0.1183 = 11.83%

e. (1) Assuming that the debt financing costs do not change, what effect would a shift to a more highly
leveraged capital structure consisting of 50% long-term debt, 0% preferred stock, and 50% common
stock have on the risk premium for Eco’s common stock? What would be Eco’s new cost of common
equity?

Habria un cambio en el risk premium

(1.5 – 1.3)*(13% - 4%) = 1.80% -> resultando que los accionistas tendran 1.8% mas cada año.

Rs = 0.04 + (1.5*(0.13 – 0.04)) = 0.1750 = 17.50%

(2) What would be Eco’s new weighted average cost of capital?

Ra = (0.50*0.0679) + (0.50*0.1750) = 0.12145 = 12.145%

(3) Which capital structure—the original one or this one—seems better? Why?

La primera pues el WACC indica el costo de una inversion sobre los accionists, resultando que en 11.83%
por cada dollar extra se le debe regresar $0.1183 al inversionista, en cambio con 12.145% se regresaria
mas indicando un mayor costo por capital de empresa.