Microelectronics Company Corporation is currently at its target debt equity ratio of 0.5 : It is considering a proposal to expand capacity
CASE STUDY (20 Marks)
Microelectronics Company Corporation is currently at its target debt equity ratio of 0.5 : It is considering a proposal to expand capacity which is expected to cost Rs 500 million and generate after tax cash flows of Rs 130 million per year for the next eight years. The tax rate for the firm is 30 per cent. Mahesh, the CFO of the company, has considered two financing options. 1) issue of equity stock. The required return on the company’s new equity is 20 per cent and the issuance cost will be 12 per cent. 2) issue of
debentures at a yield of 13 percent. The issuance cost will be 3 percent.
Answer the following question.
Q1. What are the three steps involved in calculating a firm’s WACC?
Q2. What is WACC for Micro-electronics?
Q3. What is micro-electronics weighted average flotation cost?
Q4. What is NPV of the proposed after taking into account the floatation costs?
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