[lz221476]

Here is the question:

Williams, Inc. is interested in measuring its overall cost of capital and has gathered the following data. Under

the terms described below, the company can sell unlimited amounts of all instruments.

• Williams can raise cash by selling $1,000, 8 percent, 20-year bonds with annual interest payments. In

selling the issue, an average premium of $30 per bond would be received, and the firm must pay

floatation costs of $30 per bond. The after-tax cost of funds is estimated to be 4.8 percent.

• Williams can sell 8 percent preferred stock at par value, $105 per share. The cost of issuing and selling

the preferred stock is expected to be $5 per share.

• Williams’ common stock is currently selling for $100 per share. The firm expects to pay cash dividends of

$7 per share next year, and the dividends are expected to remain constant. The stock will have to be

underpriced by $3 per share, and floatation costs are expected to amount to $5 per share.

• Williams expects to have available $100,000 of retained earnings in the coming year; once these retained

earnings are exhausted, the firm will use new common stock as the form of common stock equity

financing.

• Williams’ preferred capital structure is:

Long-term debt 30%

Preferred stock 20

Common stock 50

1.The cost of funds from the sale of common stock for Williams, Inc. (Answer: 7/92=7.6%)

2.If Williams, Inc. needs a total of $200,000, the firm’s weighted-average cost of capital would be closest to?(Answer: 6.6%)

3.If Williams, Inc. needs a total of $1,000,000, the firm’s weighted-average cost of capital would be?(Answer: 6.8%)

I noticed the way to calculate the cost of stock equity is changed in each question, but I don’t understand why. Especially sometimes the cost of common stock equity is 7/92=7.6%, sometimes it changed to 7/100=7%.

[nishvik]

I am not sure but when its 7/100 its cost of retained earnings.

I am redoing B3 HW questions so when I cm across this question will try to understand why so?

FAR- 79 -->Becker self study, Final review & Flashcards
REG -72-->Becker ,76-->Becker plus Wiley test bank
AUD- 73 Becker,72-->Becker+Wiley,69-->Added ninja notes,89 --> Added Gleim review
BEC- 84 Becker plus Wiley Test bank

I am Done !!!!

[ColoradoCPA]

1.If we raise money from outside (not from RE): 7/92=7.6% this is how we determine the cost of NEW common stock. We would consider the flotation cost and undervalue.

2. If we need $200000: we already have $100000 (it is RE), which is 50% of CS. If we have retained earning then we calculate CS this way: 7/100=7%. We would not consider the flotation cost and undervalue.

3. If we need $1,000,000: we already have $100000 (it is RE), which is 10% of CS. But we need 50% of CS (it should stay the same as given). So for 10% we use 7/10=7% (from RE) and for 40% we use 7/92=7.6% (new CS)

It is a complicated problem. I hope it helps.

FAR 81 ✓
AUD 97 ✓
BEC 75 ✓
REG 84 ✓

[lz221476]

Thanks！

[Author]

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