Integrative case 1 eco plastics company

Integrative Case 1 Eco Plastics Company

Since itsinception, Eco Plastics Company has been revolutionizing plastic and trying todo its part to save the environment. Eco’s founder, Marion Cosby, developed a biodegradableplastic that her company is marketing to manufacturing companies throughout thesoutheastern United States. After operating as a private company for six years,Eco went public in 2009 and is listed on the Nasdaq stock exchange.

As the chief financialofficer of a young company with lots of investment opportunities, Eco’s CFOclosely monitors the firm’s cost of capital. The CFO keeps tabs on each of theindividual costs of Eco’s three main financing sources: long-term debt,preferred stock, and common stock. The target capital structure for ECO isgiven by the weights in the following table: 
 

Source of capital

Weight

Long-term debt 30% Preferred stock 20 Common stock equity 50 Total 100%

At the presenttime, Eco can raise debt by selling 20-year bonds with a $1,000 par value and a
10.5% annual coupon interest rate. Eco’s corporate tax rate is 40%, and itsbonds generally require an average discount of $45 per bond and flotation costsof $32 per bond when being sold. Eco’s outstanding preferred stock pays a 9%dividend and has a $95-per-share par value. The cost of issuing and sellingadditional preferred stock is expected to be $7 per share. Because Eco is ayoung firm that requires lots of cash to grow it does not currently pay adividend to common stock holders. To track the cost of common stock the CFOuses the capital asset pricing model (CAPM). The CFO and the firm’s investmentadvisors believe that the appropriate risk-free rate is 4% and that themarket’s expected return equals 13%. Using data from 2009 through 2012, Eco’sCFO estimates the firm’s beta to be 1.3.

Although Eco’scurrent target capital structure includes 20% preferred stock, the company is
considering using debt financing to retire the outstanding preferred stock,thus shifting their target capital structure to 50% long-term debt and 50%common stock. If Eco shifts its capital mix from preferred stock to debt, itsfinancial advisors expect its beta to increase to 1.5.

 

TO DO

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

b. Calculate Eco’s current costof preferred stock.

c. Calculate Eco’s current costof common stock.

d. Calculate Eco’s currentweighted average cost capital.

e. (1) Assuming that the debtfinancing costs do not change, what effect would ashift to a more highly leveragedcapital 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?

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

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

 

 

Get 20% Discount on This Paper
Pages (550 words)
Approximate price: -

Try it now!

Get 20% Discount on This Paper

We'll send you the first draft for approval by at
Total price:
$0.00

How it works?

Follow these simple steps to get your paper done

Place your order

Fill in the order form and provide all details of your assignment.

Proceed with the payment

Choose the payment system that suits you most.

Receive the final file

Once your paper is ready, we will email it to you.

Our Services

Paper Helper has assembled a team of highly skilled writers with diverse experience in the online writing circles. Our aim is to become a one stop shop for all your Academic/ online writing. Check out below our amazing service!

Essays

Essay Writing Services

At Paper Helper, we prioritize on all aspects that creates a good grade such as impeccable grammar, proper structure, zero-plagiarism, and conformance to guidelines. The principal purpose of essay writing is to present the author's evaluation concerning a singular subject about which they have made. Since Professionalism is the mother of every success, try our team of experienced writers in helping you complete your essays and other assignments.

Admissions

Admission Papers

You have been trying to join that prestigious institution you long yearned for, but the hurdle of an admission essay has become a stumbling block. We have your back, with our proven team that has gained invaluable experience over time, your chance of joining that institution is now! Just let us work on that essay.How do you write an admission essay? How do you begin the essay? For answers, try Quality Custom Writers Now!

Editing

Editing and Proofreading

Regardless of whether you're pleased with your composing abilities, it's never an impractical notion to have a second eye go through your work. The best editing services leaves no mistake untouched. We recognize the stuff needed to polish up a writing; as a component of our editing and proofreading, we'll change and refine your write up to guarantee it's amazing, and blunder free. Our group of expert editors will examine your work, giving an impeccable touch of English while ensuring your punctuation and sentence structures are top-notch.

Coursework

Technical papers

We pride ourselves in having a team of clinical writers. The stringent and rigorous vetting process ensures that only the best persons for job. We hire qualified PhD and MA writers only. We equally offer our team of writers bonuses and incentives to motivate their working spirit in terms of delivering original, unique, and informative content. They are our resources drawn from diverse fields. Therefore your technical paper is in the right hands. Every paper is assessed and only the writers with the technical know-how in that field get to work on it.

Coursework

College Essay Writing

If all along you have been looking for a trustworthy college essay service provider that provides superb academic papers at reasonable prices, then be glad that you search has ended with us. We are your best choice! Get high-quality college essay writing from our magnificent team of knowledgeable and dedicated writers right now!

Coursework

Quality Assignment/Homework Help

We give the students premium quality assignments, without alarming them with plagiarism and referencing issues. We ensure that the assignments stick to the rules given by the tutors. We are specific about the deadlines you give us. We assure you that you will get your papers well in advance, knowing that you will review and return it if there are any changes, which should be incorporated.