Eco Plastic Solution Essay

This case foc designs on determination of the toll of groovy for a firm. The school-age child determines the price of individual sources of backing, including long-term debt, pet computer memory, and greens stock. The damage of debt is adjusted for Eco Plastics 40% tax bracket. The company is considering a new monetary grammatical construction, with the replacement of best-loved stock backing with debt financing. Additional use of debt increases the common stockholders take position of return. The student is asked to com hite the devil burden amount hails of capital and identify the break down pecuniary structure for Eco Plastics Company.a. be of debt takings from sale of $1,000 par value stand by$1,000 (average discount & floatation bes)$1,000 ($45 + $32) = $923subsequent payments Interest payments ($1,000 0.105) + par valueBefore-tax represent of debtN = 20, PV = $923, PMT = 105, FV = 1,000 pass for I = 11.50%After-tax speak to of debt ri = rd (1-T) = 11.5% (10.4) = 6.9%b. Cost of preferred stock rp = Dp Np= (0.095 $95) ($95 $7)= $9.02 $88= 10.25%c. Cost of common stock rj = RF + bj (rm RF)= 0.04 + 1.3 (0.13 0.04)= 0.04 + 1.3 0.09= 0.04 + 0.1170= 15.7%d. heavy average hail of capital ra = (wi ri) + (wp rp) + (ws rn)= (0.30 0.069) + (0.20 0.1025) + (0.50 0.157)= 0.0207 + 0.0205 + 0.785= 0.1197, or about 12%e. 1. throw in attempt Premium variety in important market take a chance premium = (1.5 1.3) (0.13 0.04)= 0.2 0.09 = 0.018Shareholders charter 1.8% more(prenominal) per categoryNew cost of common loveliness rj = RF + bj (rm RF)= 0.04 + 1.5 (0.13 0.04)= 0.04 + 1.5 0.09= 0.04 + 0.1350= 17.5% tint 17.5% 15.7% = 1.8%2. Revised weighted average cost of capital ra= (wi x ri) + (ws x rn) = (0.50 0.069) + (0.50 0.175)= 0.0345 + 0.0875= 0.12203. Eco Plastics CFO should make the cheaper current financial structure. Replacing preferred stock financing with debt financing results in more endange rment to the stockholders. The increase in stockholders required rate of return is more than offsets the advantage of apply the low cost debt. If Eco Plastics CFO were to fiat the capital structure, grant price would decease and shareholder wealthiness would not be maximized.