Masco Oil & Gas
Hayette O. Empuerto
BA 109 – Financial Management
MASCO OIL AND GAS COMPANY
I. Facts of the Case
Masco Oil and Gas Company is very large company with common stock listed on the New York Stock Exchange and bonds traded over the counter. As of the current balance sheet, it has three bond issues outstanding: $150 million of 10% series . . . . . . . . . . . . . . . . . . . . | 2021 | $50 million of 7% series . . . . . . . . . . . . . . . . . . . . . . | 2015 | $75 million of 5% series . . . . . . . . . . . . . . . . . . . . . . | 2010 |
The vice president of finance is planning to sell $75 million of bonds next year to replace the debt due to expire in 2010. Present market yields on similar Baa-rated bonds are 12.1 percent. Masco also has $90 million of 7.5% non callable preferred stock outstanding, and it has no intentions of selling any preferred stock at any time in the future. The preferred stock is currently priced and $80 per share and its dividend per share is $7.8.
The Company has had very volatile earnings, but its dividends per share have had a very stable growth rate of 8% and this will continue. The expected dividend (D1) is $1.90 per share, and the common stock is selling for $40 per share. The company’s investment banker has quoted the following flotation costs to Masco: $2.50 per share for preferred stock and $2.2 per share for common stock.
On the advice of its investment banker, Masco has kept its debt at 50% of assets and its equity at 50%. Masco sees no need to sell either common or preferred stock in the foreseeable future as it has generated enough internal funds for its investments needs when these funds are combined with debt financing. Masco’s corporate tax rate is 40%.
II. Statement of the Problem
What will be the cost of capital if the company will source out funds?
III. Objectives * Calculate its weighted cost of capital * Appraise its capital structure
IV. Alternative Courses of Action * Solve for the
BA 109 – Financial Management
MASCO OIL AND GAS COMPANY
I. Facts of the Case
Masco Oil and Gas Company is very large company with common stock listed on the New York Stock Exchange and bonds traded over the counter. As of the current balance sheet, it has three bond issues outstanding: $150 million of 10% series . . . . . . . . . . . . . . . . . . . . | 2021 | $50 million of 7% series . . . . . . . . . . . . . . . . . . . . . . | 2015 | $75 million of 5% series . . . . . . . . . . . . . . . . . . . . . . | 2010 |
The vice president of finance is planning to sell $75 million of bonds next year to replace the debt due to expire in 2010. Present market yields on similar Baa-rated bonds are 12.1 percent. Masco also has $90 million of 7.5% non callable preferred stock outstanding, and it has no intentions of selling any preferred stock at any time in the future. The preferred stock is currently priced and $80 per share and its dividend per share is $7.8.
The Company has had very volatile earnings, but its dividends per share have had a very stable growth rate of 8% and this will continue. The expected dividend (D1) is $1.90 per share, and the common stock is selling for $40 per share. The company’s investment banker has quoted the following flotation costs to Masco: $2.50 per share for preferred stock and $2.2 per share for common stock.
On the advice of its investment banker, Masco has kept its debt at 50% of assets and its equity at 50%. Masco sees no need to sell either common or preferred stock in the foreseeable future as it has generated enough internal funds for its investments needs when these funds are combined with debt financing. Masco’s corporate tax rate is 40%.
II. Statement of the Problem
What will be the cost of capital if the company will source out funds?
III. Objectives * Calculate its weighted cost of capital * Appraise its capital structure
IV. Alternative Courses of Action * Solve for the