FIN 370 Week 4 MyFinanceLab
FIN 370 Week 4, MyFinanceLab
1. The target capital structure for Jowers Manufacturing is 50 percent common stock, 15 percent preferred stock, and 35 percent debt. If the cost of equity for the firm is 20 percent, the cost of preferred stock is 12 percent, and the before-tax cost of debt is 10 percent, what is Jower’s cost of capital? The firm’s marginal tax rate is 34 percent.
2. (Weighted average cost of capital) The target capital structure for QM Industries is 40 percent common stock, 10 percent preferred stock, and 50 percent debt. If the cost of equity for the firm is 18 percent, the cost of preferred stock is 10 percent, the before-tax cost of debt is 8 percent, and the firm's tax rate is 35 percent, what is QM's weighted average cost of capital?
3. Crypton electronics has a capital structure consisting of 41% common stock and 59% debt, a debt issue of 1000 par value, 6.4 bonds that matures in 15 years and pays an annual interest well sell for $973. Common stock of the firm is selling for 30.49 per share and the firm expects to pay a 2.24 dividend next year. Dividends have grown at the rate of 5.3% per year and expected to continue to do so for the foreseeable future. What is Cryptons cost of capital where the firms tax rate is 30%
4. As a member of the finance department of ranch manufacturing, your supervisor has asked you to compute the appropriate discount rate to use when evaluating the purchase of new packaging equipment for the plant under the assumption that the firms present capital structure reflects the appropriate mix of capital source for the firms, you have determined the market value of the firm’s capital structure as follows Bonds $4,500,000, preferred stock $2,300,000, common stock $ 6,200,000. To finance the purchase ranch manufacturing will sell 10 year bonds paying 6.9 % per year @ a market price of 1,055 .preferred stock paying $2.02 dividend can be sold for 25.37 common stock for ranch manufacturing is currently selling for 55.14 per share and the firm paid a 3.07 dividend last year. Dividend are expected to continue growing at a rate of 4.7 per year into the indefinite future , if the firms tax rate is 30% what discount rate should you use to evaluate the equipment purchased . Ranch manufacturing company WACC is _____________ round 3 decimal places.
5. Abe Forrester and three Of his friends from college have interested a group of venture capitalists in backing their. The proposed operation would consist of a series of retail outlets to?Distribute and service a full line of vacuum cleaners and accessories. These stores would?Be located in Dallas, Houston, and San Antonio. To finance the new venture two plans?Have been proposed:?Plan A is an all-common-equity structure in which $2.3 million dollars would be raised?By selling 80,000 shares of common stock.? Plan B would involve issuing $1.1 million dollars in long-term bonds with an effective?Interest rate of 12.1% plus another $1.2 million would be raised by selling 40,000 shares?Of common stock. The debt funds raise funder Plan B have no fixed maturity date, in?That this amount of financial leverage is considered a permanent part of the firm?Capital structure. Abe and his partners plan to use a 34% tax rate in their analysis, and they have hired?You on a consulting basis to do the following:
A. Find the EBIT indifference level associated with the two financing plans.
B. Prepare a pro forma income statement for the EBIT level solved for in Part a. that shows that EPS will be the same regardless whether Plan A or Plan B is chosen
6. Three recent graduates of the computer science program at the University of Tennessee are forming a company that will write and distribute new application software for the iPhone. Initially, the corporation will operate in the southern region of Tennessee, Georgia, North Carolina and South Carolina. A small group of private investors in the Atlanta, Georgia are interested in financing the startup company and two financing plans have been put forth into consideration. The first plan(A) is an all common equity capital structure $2.4 million dollars would be raised by selling common stock at $10 per common share. Plan B would involve the use of financial leverage. $1.2 million would be raised by selling bonds with an effective interest rate of 11.2% and the remaining 1.2 mill would be raised by selling common stock at the $10 price per share. The use of financial leverage is considered to be a permanent part of the firms capitalization, so no fixed date is needed for the analysis. A 35% tax rate is deemed appropriate for the analysis.
A. Find the EBIT indifference rate associated with the two financing problems
B. A detailed financial analysis of the firms prospects suggests that the long term EBIT will be above $300,000 annually. Taking this into consideration, which plan will generate the higher EPS?