Question
25)The Nolan Corporation finds it is necessary to determine its marginal cost of capital. Nolan’s current capital structure calls for 40 percent debt, 10 percent preferred stock, and 50 percent common equity. Initially, common equity will be in the form of retained earnings (Ke) and then new common stock (Kn). The costs of the various sources of financing are as follows: debt, 7.2 percent; preferred stock, 5 percent; retained earnings, 12 percent; and new common stock, 13.2 percent.
a.What is the initial weighted average cost of capital? (Include debt, preferred stock, and common equity in the form of retained earnings, Ke.) (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) %
b.If the firm has $29 million in retained earnings, at what size capital structure will the firm run out of retained earnings? (Enter your answer in millions of dollars (e.g., $10 million should be entered as “10”).)
Capital structure size (X)$ million
c.What will the marginal cost of capital be immediately after that point? (Equity will remain at 50 percent of the capital structure, but will all be in the form of new common stock, Kn.) (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
Marginal cost of capital %
d.The 7.2 percent cost of debt referred to earlier applies only to the first $44 million of debt. After that, the cost of debt will be 9.2 percent. At what size capital structure will there be a change in the cost of debt?(Enter your answer in millions of dollars (e.g., $10 million should be entered as “10”).)
Capital structure size (Z)$ million
e.What will the marginal cost of capital be immediately after that point? (Consider the facts in both parts cand d.) (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)
Marginal cost of capital%
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Question
TB3)Your Answers: 1 10 2 11 3 12 4 a 5 b 6 c 7 d 8 e 9 f Type your answers in the table and submit this worksheet. Use what you have learned about the time value of money to analyze each of the following decisions: Decision #1: Which set of Cash Flows is worth more now? Assume that your grandmother wants to give you generous gift. She wants you to choose which one of the following sets of cash flows you would like to receive: Option A: Receive a one-time gift of $ 9000 today.Option B: Receive a $1300 gift each year for the next 10 years. The first $1300 would be received 1-year from today. Option C: Receive a one-time gift of $15,000 10 years from today. Compute the Present Value of each of these options if you expect the interest rate to be 3% annually for the next 10 years. Which of these options does financial theory suggest you should choose? Option A would be worth $__________ today.Option B would be worth $__________ today.Option C would be worth $__________ today.Financial theory supports choosing Option _______ Compute the Present Value of each of these options if you expect the interest rate to be 6% annually for the next 10 years. Which of these options does financial theory suggest you should choose? Option A would be worth $__________ today.Option B would be worth $__________ today.Option C would be worth $__________ today.Financial theory supports choosing Option _______
Compute the Present Value of each of these options if you expect to be able to earn 9% annually for the next 10 years. Which of these options does financial theory suggest you should choose? Option A would be worth $__________ today.Option B would be worth $__________ today.Option C would be worth $__________ today.Financial theory supports choosing Option _______ Decision #2: Planning for Retirement Tom and Tricia are 22, newly married, and ready to embark on the journey of life. They both plan to retire 45 years from today. Because their budget seems tight right now, they had been thinking that they would wait at least 10 years and then start investing $2400 per year to prepare for retirement. Tricia just told Tom, though, that she had heard that they would actually have more money the day they retire if they put $2400 per year away for the next 10 years – and then simply let that money sit for the next 35 years without any additional payments – then they would have MORE when they retired than if they waited 10 years to start investing for retirement and then made yearly payments for 35 years (as they originally planned to do). Please help Tom and Tricia make an informed decision: Assume that all payments are made at the END a year (or month), and that the rate of return on all yearly investments will be 7.5% annually. (Please do NOT ROUND when entering “Rates” for any of the questions below) How much money will Tom and Tricia have in 45 years if they do nothing for the next 10 years, then put $2400 per year away for the remaining 35 years? How much money will Tom and Tricia have in 10 years if they put $2400 per year away for the next 10 years? How much will the amount you just computed grow to if it remains invested for the remaining 35-years, but without any additional yearly deposits being made? How much money will Tom and Tricia have in 45 years if they put $2400 per year away for each of the next 45 years? How much money will Tom and Tricia have in 45 years if they put away $200 per MONTH at the end of each month for the next 45 years? (Remember to adjust 7.5% annual rate to a Rate per month!) If Tom and Tricia wait 25 years (after the kids are raised!) before they put anything away for retirement, how much will they have to put away at the end of each year for 20 years in order to have $800,000 saved up on the first day of their retirement 45 years from today?
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Question
24) Delta Corporation has the following capital structure: Cost
(aftertax)WeightsWeighted
Cost Debt (Kd) 7.5% 15% 1.13% Preferred stock (Kp) 6.2 10 0.62 Common equity (Ke) (retained earnings) 8.5 75 6.38 Weighted average cost of capital (Ka) 8.12% a.If the firm has $48 million in retained earnings, at what size capital structure will the firm run out of retained earnings? (Enter your answer in millions of dollars (e.g., $10 million should be entered as “10”).) Capital structure size (X)$ million
b.The 7.5 percent cost of debt referred to earlier applies only to the first $15 million of debt. After that, the cost of debt will go up. At what size capital structure will there be a change in the cost of debt? (Enter your answer in millions of dollars (e.g., $10 million should be entered as “10”).) Capital structure size (Z)$million
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Question
10)The Summitt Petroleum Corporation will purchase an asset that qualifies for three-year MACRS depreciation. The cost is $280,000 and the asset will provide the following stream of earnings before depreciation and taxes for the next four years: Use Table 12-12.
Year 1$139,000 Year 2 182,000 Year 3 64,000 Year 4 62,000
The firm is in a 35 percent tax bracket and has a cost of capital of 12 percent. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.
a.Calculate the net present value. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places.)
Net present value$
b.Under the net present value method, should Summitt Petroleum Corporation purchase the asset? YesNo
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