Question
11)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 10.5 percent coupon rate and another bond with an 8.1 percent rate. The firm has been informed by its investment banker that bonds of equal risk and credit rating are now selling to yield 11.4 percent. The common stock has a price of $59 and an expected dividend (D1) of $1.79 per share. The historical growth pattern (g) for dividends is as follows: $1.34 1.48 1.63 1.79 The preferred stock is selling at $79 per share and pays a dividend of $7.50 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 20 percent debt, 10 percent preferred stock, and 70 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) %
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)
| Global Technology’s capital structure is as follows: |
| | |
| Debt | 35 | % |
| Preferred stock | 15 | |
| Common equity | 50 | |
| |
| The aftertax cost of debt is 7.00 percent; the cost of preferred stock is 11.00 percent; and the cost of common equity (in the form of retained earnings) is 14.00 percent. |
| Calculate the Global Technology’s 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) | % |
| | | |
| |
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Question
14)The Pan American Bottling Co. is considering the purchase of a new machine that would increase the speed of bottling and save money. The net cost of this machine is $72,000. The annual cash flows have the following projections. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. YearCash Flow1$ 35,000 238,000 335,000 428,000 512,000
a.If the cost of capital is 12 percent, what is the net present value of selecting a new machine? (Do not round intermediate calculations and round your final answer to 2 decimal places.) Net present value$
b.What is the internal rate of return? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
Internal rate of return %
c.Should the project be accepted? YesNo
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Question
20)Dixie Dynamite Company is evaluating two methods of blowing up old buildings for commercial purposes over the next five years. Method one (implosion) is relatively low in risk for this business and will carry a 11 percent discount rate. Method two (explosion) is less expensive to perform but more dangerous and will call for a higher discount rate of 16 percent. Either method will require an initial capital outlay of $96,000. The inflows from projected business over the next five years are given next. YearsMethod 1Method 21$33,600 $25,400 2 35,800 28,200 3 45,600 43,100 4 40,700 37,900 5 24,900 77,200
Use Appendix B for an approximate answer but calculate your final answers using the formula and financial calculator methods. a.Calculate net present value for Method 1 and Method 2. (Do not round intermediate calculations and round your answers to 2 decimal places.)
Net Present Value Method 1$ Method 2$
b.Which method should be selected using net present value analysis? Method 1Method 2Neither of these
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