Question
22)A-Rod Manufacturing Company is trying to calculate its cost of capital for use in making a capital budgeting decision. Mr.Jeter, the vice-president of finance, has given you the following information and has asked you to compute the weighted average cost of capital. The company currently has outstanding a bond with a 10.1 percent coupon rate and another bond with an 7.7 percent rate. The firm has been informed by its investment banker that bonds of equal risk and credit rating are now selling to yield 11.0 percent. The common stock has a price of $55 and an expected dividend (D1) of $1.75 per share. The historical growth pattern (g) for dividends is as follows: $1.30 1.44 1.59 1.75 The preferred stock is selling at $75 per share and pays a dividend of $7.10 per share. The corporate tax rate is 30 percent. The flotation cost is 2.0 percent of the selling price for preferred stock. The optimum capital structure for the firm is 25 percent debt, 10 percent preferred stock, and 65 percent common equity in the form of retained earnings. a.Compute the historical growth rate. (Do not round intermediate calculations. Round your answer to the nearest whole percent and use this value as g. Input your answer as a whole percent.) Growth rate % b.Compute the cost of capital for the individual components in the capital structure. (Use the rounded whole percent computed in part a for g. Do not round any other intermediate calculations. Input your answers as a percent rounded to 2 decimal places.) Cost of Capital Debt (Kd) % Preferred stock (Kp) Common equity (Ke) c.Calculate the weighted cost of each source of capital and the weighted average cost of capital. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.) Weighted Cost Debt (Kd) % Preferred stock (Kp) Common equity (Ke) Weighted average cost of capital (Ka) %
Looking for a Similar Assignment? Order now and Get 10% Discount! Use Coupon Code "Newclient"
Question
21)Sauer Milk Inc. wants to determine the minimum cost of capital point for the firm. Assume it is considering the following financial plans: Cost
(aftertax)Weights Plan A Debt 7.0% 15% Preferred stock 14.0 10 Common equity 18.0 75 Plan B Debt 7.5% 25% Preferred stock 14.5 10 Common equity 19.0 65 Plan C Debt 8.0% 35% Preferred stock 21.7 10 Common equity 15.8 55 Plan D Debt 15.0% 45% Preferred stock 22.2 10 Common equity 17.5 45
a-1.Compute the weighted average cost for four plans. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.)
Weighted Cost Plan A % Plan B % Plan C % Plan D %
a-2.Which of the four plans has the lowest weighted average cost of capital? Plan APlan BPlan CPlan D
b.What is the relationship between the various types of financing costs and the debt-to-equity ratio? All types of financing costs increase as the debt-to-equity ratio increases.All types of financing costs decrease as the debt-to-equity ratio increases.
Looking for a Similar Assignment? Order now and Get 10% Discount! Use Coupon Code "Newclient"
Question
17)Wallace Container Company issued $100 par value preferred stock 10 years ago. The stock provided a 7 percent yield at the time of issue. The preferred stock is now selling for $64. What is the current yield or cost of the preferred stock? (Disregard flotation costs.) (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.) Current yield%
Looking for a Similar Assignment? Order now and Get 10% Discount! Use Coupon Code "Newclient"
Question
14)Airborne Airlines Inc. has a $1,000 par value bond outstanding with 10 years to maturity. The bond carries an annual interest payment of $112 and is currently selling for $860. Airborne is in a 30 percent tax bracket. The firm wishes to know what the aftertax cost of a new bond issue is likely to be. The yield to maturity on the new issue will be the same as the yield to maturity on the old issue because the risk and maturity date will be similar. a.Compute the yield to maturity on the old issue and use this as the yield for the new issue. (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.) Yield on new issue % b.Make the appropriate tax adjustment to determine the aftertax cost of debt. (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.) Aftertax cost of debt%
Looking for a Similar Assignment? Order now and Get 10% Discount! Use Coupon Code "Newclient"
