Calculate Optimal Capital Stacks and WACC for the firm raising $50 million for each scenario outlined above for:
1. Case of available Government Supports (GE and GG)
2. Case of no Government Supports at all
3. Case of only Government Equity
Provide visualization(s) and analysis of your results. Specifically, discuss how valuable Government Grants and Government Equity are to the company.
Discuss how changes in interest rates across bank loans, Private Equity, and Government funds change/influence company WACC and optimal capital structure.
First, an example: company is trying to raise $50 million. Assume:
Source of funding: Bank loans (BL), Private equity (PE), Government funds (GG)
Cost quoted, %:
- Bank loans: 7.50%
- Private equity: 8.75% to 14.00%
- Government funds: $1 million start-up fund (GG)
Corporate tax rate: 0.00% to 5.00% to 25%
Stack and WACC:
Source: GE, BL1, BL2, PE
Cost Volume: 5 0.00% 1,000,000.00
Tax Shield: ACC Contribution at a lower $id - Lowest Cost Funding
2%
0%
$50,000
up to million
5.00% 5,000,000.00
10% 20% 30%
0% 25% 25%
0.50% 1.13%
te 525 - 2nd Lowest Cost of Funding
3rd Lowest Cost of Funding
7.50% 10,000,000.00 5 8.75% 15,000,000.00
scenario 3
th Lowest Cost of Funding
1.97%
million
Highest Cost of Funding
PE
14.00% 19,000,000.00
38%
0%
5.32% 8.91%
Total Optimal WACC
$50,000,000.00
scenario 58
Support Con support
8.91%
scenario 58
10.09% Value of all Gov Support
1.18% 0.28%
9.19% Value of Gov G
Bank will not lend >$25,000,000 0.000090
shield in place