a) Calculate the firm's cost of capital for both internal and external common equity financing, assuming...

 


 

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a) Calculate the firm's cost of capital for both internal and external common equity financing, assuming 35% tax rate. (22 marks) b) Provide the best estimate of the firm's earnings per share. (3 marks) During the past few years, Harry Davis Industries has been too constrained by the high cost of capital to make many capital investments. Recently, though, capital costs have been declining, and the company has decided to look seriously at a major expansion program that has been proposed by the marketing department. Assume that you are an assistant to Leigh Jones, the financial vice president. Your first task is to estimate Harry Davis' cost of capital, based on the following: The firm's 8% coupon, semi-annual payment, non-callable bonds, with 15 years left to maturity are currently trading at 1.09, but have face value of $5 million. New bonds, if issued, would incur 4% after-tax flotation costs. The current price of firm's 6%, $25 par value, quarterly dividend, preferred stock is $20. After-tax Flotation costs of 5% would be incurred on any new issue, but there are 100,000 preferred stock currently issued. The firm's common stock is currently trading at $50 per share. Its most recent dividend was $2 per share, which is expected to grow at a constant rate of 6%. The firm's beta is 1.2, the treasury yield is 2% and the market risk premium is estimated to be 7%. After-tax flotation costs of 2.5% would be incurred on any new issue, but there are 200,000 common stock currently issued. a) Calculate the firm's cost of capital for both internal and external common equity financing, assuming 35% tax rate. (22 marks) b) Provide the best estimate of the firm's earnings per share. (3 marks) During the past few years, Harry Davis Industries has been too constrained by the high cost of capital to make many capital investments. Recently, though, capital costs have been declining, and the company has decided to look seriously at a major expansion program that has been proposed by the marketing department. Assume that you are an assistant to Leigh Jones, the financial vice president. Your first task is to estimate Harry Davis' cost of capital, based on the following: The firm's 8% coupon, semi-annual payment, non-callable bonds, with 15 years left to maturity are currently trading at 1.09, but have face value of $5 million. New bonds, if issued, would incur 4% after-tax flotation costs. The current price of firm's 6%, $25 par value, quarterly dividend, preferred stock is $20. After-tax Flotation costs of 5% would be incurred on any new issue, but there are 100,000 preferred stock currently issued. The firm's common stock is currently trading at $50 per share. Its most recent dividend was $2 per share, which is expected to grow at a constant rate of 6%. The firm's beta is 1.2, the treasury yield is 2% and the market risk premium is estimated to be 7%. After-tax flotation costs of 2.5% would be incurred on any new issue, but there are 200,000 common stock currently issued.

Answer rating: 100% (QA)

a Calculating the firms cost of capital for both internal and external common equity financing 1 Cos... View the full answer