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Posted: May 12th, 2020
Cost of Capital, assignment help
Question description
Assignment: Cost of Capital
This
assignment will assess the competency 3. CREATE financing alternatives to
improve shareholder wealth.
Directions:Christopher William, president of William
Industries which produces widgets, has hired you to determine its cost of debt
and the cost of equity capital. The stock currently sells for $25 per
share and the dividend will be $5. Christopher argues that it will cost
us $5 per share to use the stockholders money this year therefore the cost of
equity is equal to 20%. Furthermore, Christopher believes that the cost
of debt is 25%. This is based upon the most recent financial statements
which show that William Industries has total liabilities of $10 million and
will face total interest expenses for the year of $2.5 million.
Christopher argues that the company should increase its use of equity financing
because debt costs 25% while equity only costs 20% and thus equity is
cheaper. Is Christopher’s analysis of the cost of equity, debt, and
decision to increase the use of equity financing over debt financing
accurate? Defend your answers in a 500 to 750 word report and cite your
sources.
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