Case 100 Pressed Paper Products , Inc. Cost of Capital Directed Pressed Paper Products , Inc . ( PPP ) operates a paper mill on the White River in...

How can one estimate the cost of external equity under various methods (Q10)? Further explanation and detail can be found at the bottom if needed.

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Case 100Pressed Paper Products , Inc.Cost of CapitalDirectedPressed Paper Products , Inc . ( PPP ) operates a paper mill on the White River in central New Hampshire .Mount Washington and the Presidential Ranges can be seen on the horizon to the north of the plant . The planthas been operated continuously since 1710 and produces many non - woven paper pulp products . Its mostfamous product is tea bag paper , which the company started producing in the late 19" century .Tea bag paper is manufactured from trees and recycled paper pulp . Sheets of fibrous , non - wovenmaterial are pressed and cut to tea bag size , and then sold to tea manufacturers where they are filled withchopped tea leaves , sealed , and strings or tags are attached . The fibrous paper is completely porous andallows water to flow freely through the tea , while the leaves are contained within the bag . The tea bag methodof tea brewing is used primarily in Europe and the Americas . Asian cultures normally prefer to brew tea withwhole leaves and without paper filtering bags .PPP is one of the oldest companies on the American Stock Exchange but has been publicly traded foronly 50 years . It has broadened its product line to include numerous specialty materials , including medicalgauze , egg carton board , cigarette wrappers and filters , and food and beverage can varnishes . The companyalso owns controlling interest in a very profitable Silicon Valley technology firm . Although now a diversifiedcompany , tea bag paper is the root of the company .Currently , three companies produce $8% of the tea bag paper in the world : Pressed Paper Products ,The Great Paper Company of Edinburgh ( located in Scotland ) and Lincoln Paper and Fiber ( located innorthern Illinois ) . The tea bag paper market is nearly evenly split among these three companies , and priceshave been driven to commodity levels that are only slightly more than the variable costs of production . Foryears , rumors have persisted about Edinburgh's financial struggles and that management may entertainacquisition offers . Last year their investment bankers began discussing the possibility of a sale with potentialbuyers . Because of the Edinburgh's debt levels ( 85% debt to total capital ) and slipping market share , PPP washesitant to pursue an acquisition . However , management believes that Lincoln Paper and Fiber is considering*the acquisition . The Board of Directors is concerned that if their primary competitor controls a major interestin the market , additional price and cost pressure will hurt PPP's tea bag paper unit . Therefore , PPP's Board ofdirectors is considering the acquisition to keep Lincoln from increasing their market share . To help in thedecision process PPP is interested in determining whether the return generated from the purchase will coverLincoln's cost of capital . Analysts believe that , given current market and company conditions , Lincoln is at itstarget capital structure and the company will maintain this mix of debt and equity .Relatives of Lincoln's founder own forty percent of Lincoln's equity . The company has a highdividend payout ratio that provides a major source of income for these family members , and therefore , it is notexpected to change . Additionally , it recently completed an acquisition of another paper company bringing teaDag paper to about 25 percent of company sales . Because of this purchase , near-term free cash flow is tight .New debentures were issued and the company maintains a two - year- old callable bond that was issued with a"i've year deferred call provision requiring a call premium of one - year interest . Assimilating the acquisition