a) The Basket Weavers Company has 100,000 bonds outstanding that are selling at par value. Bonds...

  

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a) The Basket Weavers Company has 100,000 bonds outstanding that are selling at par value. Bonds with similar characteristics are yielding 7.5 percent. The company also has 1 million shares of 10.5 percent preferred stock outstanding and 5 million shares of common stock outstanding. The preferred stock sells for $56 per share. The common stock has a beta of 1.2 and sells for $38 a share. The U.S. Treasury bill is yielding 3 percent and the return on the market is 12 percent. The corporate tax rate is 34 percent. What is Basket Weaver's weighted average cost of capital? (5 marks) b) Martin Enterprise has compiled the following information about its capital structure and estimated costs of new financing: Book Value (XAF) Source of Capital Long term Debt Preferred Stock Common Equity Market value (XAF) After tax cost (%) 2,000,000 1,800,000 7 500,000 600,000 1,500,000 3,600,000 The company expects to have a significant amount of retained earnings available and does not expect to sell any additional common stock. 12 16 (1) (ii) What is the firm's WACC using book value weights? (2.5 marks) What is the firm's WACC using Market value weights? (2.5 marks) c) Tanya Industries is planning to sell a new 12% bond maturing in 15 years at XAF1,000 each. Each bond has a flotation charge of XAF30. If the firm's tax rate is 34%, what is the approximate after-tax cost of new bonds? (5 marks) a) The Basket Weavers Company has 100,000 bonds outstanding that are selling at par value. Bonds with similar characteristics are yielding 7.5 percent. The company also has 1 million shares of 10.5 percent preferred stock outstanding and 5 million shares of common stock outstanding. The preferred stock sells for $56 per share. The common stock has a beta of 1.2 and sells for $38 a share. The U.S. Treasury bill is yielding 3 percent and the return on the market is 12 percent. The corporate tax rate is 34 percent. What is Basket Weaver's weighted average cost of capital? (5 marks) b) Martin Enterprise has compiled the following information about its capital structure and estimated costs of new financing: Book Value (XAF) Source of Capital Long term Debt Preferred Stock Common Equity Market value (XAF) After tax cost (%) 2,000,000 1,800,000 7 500,000 600,000 1,500,000 3,600,000 The company expects to have a significant amount of retained earnings available and does not expect to sell any additional common stock. 12 16 (1) (ii) What is the firm's WACC using book value weights? (2.5 marks) What is the firm's WACC using Market value weights? (2.5 marks) c) Tanya Industries is planning to sell a new 12% bond maturing in 15 years at XAF1,000 each. Each bond has a flotation charge of XAF30. If the firm's tax rate is 34%, what is the approximate after-tax cost of new bonds? (5 marks)