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?

 

 

Study Locus
Calculate your paper price
Pages (550 words)
Approximate price: -

Why Work with Us

Top Quality and Well-Researched Papers

We always make sure that writers follow all your instructions precisely. You can choose your academic level: high school, college/university or professional, and we will assign a writer who has a respective degree.

Professional and Experienced Academic Writers

We have a team of professional writers with experience in academic and business writing. Many are native speakers and able to perform any task for which you need help.

Free Unlimited Revisions

If you think we missed something, send your order for a free revision. You have 10 days to submit the order for review after you have received the final document. You can do this yourself after logging into your personal account or by contacting our support.

Prompt Delivery and 100% Money-Back-Guarantee

All papers are always delivered on time. In case we need more time to master your paper, we may contact you regarding the deadline extension. In case you cannot provide us with more time, a 100% refund is guaranteed.

Original & Confidential

We use several writing tools checks to ensure that all documents you receive are free from plagiarism. Our editors carefully review all quotations in the text. We also promise maximum confidentiality in all of our services.

24/7 Customer Support

Our support agents are available 24 hours a day 7 days a week and committed to providing you with the best customer experience. Get in touch whenever you need any assistance.

Try it now!

Calculate the price of your order

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

No need to work on your paper at night. Sleep tight, we will cover your back. We offer all kinds of writing services.

Essays

Essay Writing Service

No matter what kind of academic paper you need and how urgent you need it, you are welcome to choose your academic level and the type of your paper at an affordable price. We take care of all your paper needs and give a 24/7 customer care support system.

Admissions

Admission Essays & Business Writing Help

An admission essay is an essay or other written statement by a candidate, often a potential student enrolling in a college, university, or graduate school. You can be rest assurred that through our service we will write the best admission essay for you.

Reviews

Editing Support

Our academic writers and editors make the necessary changes to your paper so that it is polished. We also format your document by correctly quoting the sources and creating reference lists in the formats APA, Harvard, MLA, Chicago / Turabian.

Reviews

Revision Support

If you think your paper could be improved, you can request a review. In this case, your paper will be checked by the writer or assigned to an editor. You can use this option as many times as you see fit. This is free because we want you to be completely satisfied with the service offered.