Eco Plastics Company

Since its inception, Eco Plastics Company has been revolutionizing plastic and trying to do its part to save the environment. Eco’s founder, Marion Cosby, developed a biodegradable plastic that her company is marketing to manufacturing companies throughout the southeastern United States. After operating as a private company for 6 years, Eco went public in 2012 and is listed on the Nasdaq stock exchange.

As the chief financial officer of a young company with lots of investment opportunities, Eco’s CFO closely monitors the firm’s cost of capital. The CFO keeps tabs on each of the individual costs of Eco’s three main financing sources: long-term debt, preferred stock, and common stock. The target capital structure for Eco is given 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 present time, 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 its bonds generally require an average discount of $45 per bond and flotation costs of $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 selling additional preferred stock is expected to be $7 per share. Because Eco is a young firm that requires lots of cash to grow it does not currently pay a dividend to common stockholders. To track the cost of common stock the CFO uses the capital asset pricing model (CAPM). The CFO and the firm’s investment advisors believe that the appropriate risk-free rate is 4% and that the market’s expected return equals 13%. Using data from 2012 through 2015, Eco’s CFO estimates the firm’s beta to be 1.3.

See also  Nursing Diagnosis and Interventions for Syncope- A Student's Guide

Although Eco’s current 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, its financial advisors expect its beta to increase to 1.5.


· a. Calculate Eco’s current after-tax cost of long-term debt. Andre

· b. Calculate Eco’s current cost of preferred stock.

· c. Calculate Eco’s current cost of common stock.

· d. Calculate Eco’s current weighted average cost capital.

· e.

· (1) Assuming that the debt financing costs do not change, what effect would a shift to a more highly leveraged capital 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 new weighted average cost of capital?

· (3) Which capital structure—the original one or this one—seems better? Why?

Does this Look Like Your Assignment? We Can do an Original Paper for you!

Have no Time to Write? Let a subject expert write your paper for You​

Have a subject expert Write for You

Have a subject expert finish your paper for You

Edit My Paper For Me

Have an Expert Write Your Dissertation's Chapter

Popular Searches
AACN BSN Essentials And Your Future Practice Assignment Advanced Physical Assessment Arizona State University Capella University Capella University Personal Leadership Portrait Homework Chamberlain University characteristics of performance-driven team Designing a Plan for Outcome Evaluation Discussion: Big Data Risks and Rewards Discussion: Classified Nursing knowledge Discussion: Nursing Informatics-Eportfolio DNP Assignments Eleven Blue Men assignment ENERGY METABOLISM AND WEIGHT CONTROL ASSIGNMENT Grand Canyon University Health History and Interview Herzing University Implementing Change With an Interprofessional Approach Presentation Management Assignments Management Assignments Help Management Guides MSN Assignments NHS FPX 4000 Assessment 2 Applying Research Skills Non-Traditional Family Case Study NRSE 6050 Professional Nursing and State-Level Regulations NSG6435 Practicum III Family Health – Pediatrics NURS6051 Transforming Nursing and Healthcare through Technology nursing care plans Nursing Care Plans Examples Oncological Disorders Personal Philosophy Of Nursing Paper Essay Assignment Population Health Research and PICOT Statement PTSD Reflection Models Self-Assessment of NLN Nurse Educator Core Competencies Solved essays Statistics Structural Versus Strategic Family Therapies Student's Essays The Impact of Standardized Nursing Terminology The Iron Triangle Assignment Transformations of DIKW Walden University Week 6: Concepts of Endocrine Disorders When Patient Advocacy Meets Policy