# FIN 370 Week 4 My Finance Lab

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FIN 370 Week 4 My Finance Lab

Problem 1

(Cost or Preferred Stock) The preferred stock of Gator Industries sells for \$34.07 and pays \$2.76 per year in dividends. What is the cost of preferred stock financing? If Gator were to issue 549,000 more preferred shares just like the ones it currently has outstanding. it could sell them for \$34.07 a share but would incur flotation costs of \$3.21 per share. What are the flotation costs for issuing the preferred shares and how should this cost be incorporated into the NPV of the project being financed? The firm's cost of preferred stock financing is?

Problem 2

(Cost of debt) The Walgreen Corporation is contemplating a new investment that it plans to finance using one-third debt. The firm can sell new \$1,000 par value bonds with a 15-year maturity at a price of \$954 that carry a coupon interest rate of 13.8 percent that is paid semiannually. If the company is in a 34 percent tax bracket, what is the after-tax cost of capital to Walgreen for the bonds?

Problem 3

(Cost or debt) Gillian Stationery Corporation needs to raise \$600,000 to improve its manufacturing plant. It has decided to issue a \$1,000 par value bond with an annual coupon rate of 8.0 percent with interest paid semiannually and a 10-year maturity. Investors require a rate of return of 10.0 percent.

a. Compute the market value of the bonds.

b. How many bonds will the firm have to issue to receive the needed funds?

c. What is the firm's after-tax cost of debt if the firm's tax rate is 34 percent?

Problem 4

(Weighted average cost or capital) As a consultant to GBH Skiwear, you have been asked to compute the appropriate discount rate to use in the evaluation of the purchase of a new warehouse facility. You have determined the market value of the firm's current capital structure (which the firm considers to be its target mix of financing sources) as follows: To finance the purchase, GBH will sell 20-year bonds with a \$1,000 par value paying 8.5 percent per year (paid semiannually) at the market price of \$937. Preferred stock paying a \$2.41 dividend can be sold for \$34.46. Common stock for GBH is currently selling for\$50.96 per share. The firm paid a \$3.93 dividend last year and expects dividends to continue growing at a rate of 4.2 percent per year into the indefinite future. The firm's marginal tax rate is 34 percent. What discount rate should you use to evaluate the warehouse project?

Problem 5

(Describing a firm's capital structure) Lowe's Companies Inc. (LOW) and its subsidiaries operate as a home improvement retailer in the United States and Canada. As of February 1, 2008, it operated 1,534 stores in 50 states and Canada. The company's balance sheet for February 1, 2008, included the following sources of financing.

a. Calculate the values of Lowe's debt ratio and interest-bearing debt ratio

b. If the market value of Lowe's common equity is \$35.86 billion and Lowe's has no excess cash. what is the firms debt-to-enterprise-value ratio? (Hint: you may assume that the market value of the firm's interest-bearing debt equals its book value.)

Problem 6

(Computing interest tax savings) Dharma Supply has earnings before interest and taxes (EBIT) of \$576,000, interest expenses of \$295,000, and faces a corporate tax rate of 34 percent.

a. What is Dharma Supply's net income?

b. What would Dharma's net income be if it didn't have any debt (and consequently no interest expense)?

c. What are the firm's interest tax savings?

Problem 7

(Leverage and EPS) You have developed the following pro forma income statement for your corporation.

a. If sales should increase by 30 percent. by what percent would earnings before interest and taxes and net income increase?

b. If sales should decrease by 30 percent, by what percent would earnings before interest and taxes and net income decrease?

c. If the firm were to reduce its reliance on debt financing such that interest expense were cut in half (how would this affect your answers to parts a and b?

Problem 8

(EBIT-EPS break-even analysis) Home Depot Inc. (HD) had 1.70 billion shares of common stock outstanding in 2008, whereas Lowes Companies,. Inc. (LOW) had 1.46 billion shares outstanding. Assuming Home Depot's 2008 interest expense is \$696 million Lowes' interest expense is \$239 million and a 36 percent tax rate for both firms, what is their break-even level of operating income. (i.e the level of EBIT where EPS is the same for both firms)?

Problem 9

(Individual or component costs of capital) Compute the cost of capital for the firm for the following:

Problem 10

Templeton Extended Care Facilities, Inc is considering the acquisition of a chain of cemeteries for \$390 million. Since the primary assest of this business is real estate, Templeton's management has determined that they will be able to borrow the majority of the money needed to buy the business. The current owners have no debt financing but Templeton plans to borrow \$280 million and invest only \$110 million in equity in the acquisition. What weights should Templeton use in computing the WAAC for this acquisition?

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