1. Tour of Refinance
Now, as you can see here at the top, we have a new
Excel template open, it's labeled as "2. Capital Financing Template" If
you didn't get a chance to download this, go back to the last
lesson, please and download it, and we'll meet you here.
So we have a situation here where the company has decided to proceed
with the project outlined above, and it has the opportunity to refinance
its current debt and replace it with a brand new issuance.
So your goal here is going to be to complete the weighted average
cost of capital in this cell, but in order to do that,
we're gonna need to perform some work down here below.
So you should be able to start off here and backsolve for the
amount of equity in the current capital structure. For additional capital
in this cell, you'll need to look at the project up at the
top that the company is considering or actually decided to proceed with.
So this additional capital here together with the current capital structure
should allow you to solve for the amount of total capital down this
column here, then you can backsolve for the amount of equity in this
column here. That will allow you to calculate here the weight of debt
for each one of these five potential situations that the company is looking
at. These are the pre tax costs of debt, so you should be
able to calculate here the after tax cost of debt using the tax
rate, which you'll find down below. We already have for you here,
the cost of equity put in place. So you need to calculate the
weight of the equity, then you'll have everything you need to calculate
the weighted average cost of capital, and you should be able to then
look through these and select which one is optimal here.
You can even use a formula in here to determine which one is
optimal. Just a little hint. If you put a one in these cells,
you get a check box. With a zero, you'll just get a dash
like that. Once you've decided on the correct weighted average cost of capital,
then you can summarize it down here, with the weight of debt and
the weight of equity, the cost of each, and then use those to
calculate the weighted average cost of capital down here. Once you've done
this step, don't forget to go back up to row 10 and complete
the weighted average cost of capital there. Good luck.
2. Let's practice!