Bibbidi Bobbidi Boo Fireplaces is considering the broadening…
Bibbidi Bobbidi Boo Fireplaces is considering the broadening of its horizons and is looking at investing into the carriage trade. Before any analysis of the cash flows can begin, the CEO, Ms. Cindy Ella, must select an appropriate discount rate. The accountant, Rick Tepsters, suggests the calculation of the cost of capital.The following is the existing (book value) capital structure of BBB Fireplaces. The yield on 91-day Government of Canada Treasury Bills is currently 11.78%.The debentures, which have been outstanding for three years, have a coupon rate of 14%. Current market yields on this risk security are currently about 12.5%. Flotation costs would be 2% of the issue price.The preferred shares with a fixed dividend rate of 7% currently trade at a market value of $3,000,000. Flotation expenses of a new issue of preferreds would be 3% of the issue price.The common shares, of which there are 5 million outstanding, are currently priced at $5.00 per share. The current dividend is $0.10 per share. Bibbidi Bobbidi Boo’s beta is 1.2 and its projected growth rate is 16% annually, particularly if this new project does not turn into a pumpkin. Flotation expenses would be 5% of the existing share price.Bibbidi Bobbidi Boo’s tax rate is 41% and the current exchange rate is 1 Canadian dollar equal to $0.86 U.S.Internally generated funds will have to be supplemented by princely new external sources for the equity contribution to new capital projects.Calculate the cost of capital of Bibbidi Bobbidi Boo. Use market value weightings.
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