7 Eagle Creek Resources Inc Is Preparing Its Analysis Of Capital Projects For The Next Capital Budgeting Cycle As Pa 1 (48.29 KiB) Viewed 44 times
7 Eagle Creek Resources Inc Is Preparing Its Analysis Of Capital Projects For The Next Capital Budgeting Cycle As Pa 2 (18.08 KiB) Viewed 44 times
7. Eagle Creek Resources, Inc. is preparing its analysis of capital projects for the next capital budgeting cycle. As part of the preparation, Eagle Creek needs to estimate it's cost of capital. Eagle Creek has a market to book ratio of 1.0, a 40% debt ratio, a 60% dividend payout ratio and a 40% marginal tax rate. Eagle Creek has no preferred stock. The company's most recent earnings per share were $4.17. Eagle Creek expects to earn a net income next year of $6 million. Eagle Creek has a bond issue outstanding that has an 8.2% coupon rate, a $1,000 face value, and 20 years remaining until maturity. The bonds currently sell for $877.48 cach. New debt issued would have a 20-year maturity and would be privately placed thus incurring no flotation cost. The company's stock is currently quoted at a price of $28.00 per share. New stock issued would incur a 20% flotation charge. Eagle Creck uses the dividend growth model (DCF) to estimate the cost of equity capital and assumes that future growth will be constant. Calculate the following for Eagle Creek Resources: a Before tax cost of debt 9.60% After tax cost of debt 5.76% b. C Cost of internal cquity (retained earnings) 15.43%
d. Cost of external equity (new common stock) 17.79% c. WACC using internal cquity 11.56% f. WACC using external equity 12.98% g Break point for internal equity $4,000,000
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