This financing plan will allow Langley to raise the necessary capital while maintaining its target capital structure.
External financing needed: $80,000,000 - $15,000,000 = $65,000,000
Bonds issued: $65,000,000 / (1 + 0.10 * (1 - 0.40)) = $61,320,754
Preferred stock issued: ($65,000,000 - $61,320,754) / (1 + 0.12 * (1 - 0.40)) = $3,432,132
Common stock issued: ($65,000,000 - $61,320,754 - $3,432,132) / $58 = $4,260
New long-term debt: $175,000,000 + $61,320,754 = $236,320,754
New preferred stock: $50,000,000 + $3,432,132 = $53,432,132
New common equity: $275,000,000 + ($4,260 * $58) = $275,004,260
This financing plan will allow Langley to raise the necessary capital while maintaining its target capital structure. The use of a mix of debt and equity will help to minimize the cost of capital and maximize shareholder value.
Langley Industries plans to acquire new assets costing $80 million during the coming year and is in the process of determining how to finance the acquisitions. The business plan for the coming year indicates that retained earnings of $15 million will be available for new investments. As far as external financing is concerned, discussions with investment bankers indicate that market conditions for Langley securities should be as follows.
Bonds with a coupon rate of 10% can be sold at par.
Preferred stock with an annual dividend of 12% can be sold at par.
Common stock can be sold to yield Langley $58 per share.
The company’s current capital structure, which is considered optimal, is as follows.
Long-term debt $175 million
Preferred stock 50 million
Common equity 275 million
Financial studies performed for Langley indicate that the cost of common equity is 16%. The company has a 40% marginal tax rate. (Ignore floatation costs for all calculations.)
Determine how Langley should finance its $80 million capital expenditure program, considering all sources of funds. Be sure to identify how many new shares of common stock will have to be sold.