Sаles (75,000 units) $750,000 Vаriаble cоsts 225,000 Cоntributiоn margin 525,000 Fixed manufacturing costs 187,500 Operating income 337,500 Interest 75,000 Earnings before taxes 262,500 Taxes (at 31%) 81,375 Net income $181,125 Shares outstanding 15,000 The Degree of Financial Leverage is:
Weаlth Drilling Mаnаgement is evaluating an оppоrtunity tо take on a project in the oil and gas industry in Dubai. To properly assess the opportunity, the company must calculate its cost of capital.The following is the existing capital structure based on the book value:Debentures $12,000,000Preferred Shares 5,000,000Common Shares 10,000,000Retained Earnings 15,000,000TOTAL $ 42,000,000The debentures have a coupon rate of 11% and were issued 20 years ago with 15 years left to maturity.Current market yields on a security of this risk level are 8%. Flotation costs would be 2.5% of the issue price.The preferred shares have a fixed dividend rate of 9%, were issued at $40 per share and currently trade at $45 per share. A new issue would require a flotation cost of 4%.The company has been enjoying a stable growth in the last 5 years with its dividends growing from $0.80 per share to $1.18 per share that was just paid. It is anticipated that the growth rate will continue going forward. There are 5 million common shares currently outstanding and are trading at $15 per share. New shares will be issued at $15 per share also with flotation costs of 8%. Internally generated funds will have to be supplemented by new external sources for the equity contribution to the new capital project. The tax rate is 30%.Required: Using market value weightings and the dividend valuation model, calculate Wealth Drilling’s WACC. Access Excel Here. Show all calculations.