Business has been good for Keystone Control Systems, as indicated by the eleven-year growth in earnings...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Business has been good for Keystone Control Systems, as indicated by the eleven-year growth in earnings per share. The earnings have grown from $1.00 to $2.58. a. Determine the compound annual rate of growth in earnings (n = 11). Note: Do not round Intermediate calculations. Input your answer as a percent rounded to 2 decimal places. Compound annual rate of growth % b. Based on the growth rate determined in part a, project earnings for next year (E1). Note: Do not round Intermediate calculations. Round your answer to 2 decimal places. E₁₁ c. Assume the dividend payout ratio is 35 percent. Compute D₁. Note: Do not round Intermediate calculations. Round your answer to 2 decimal places. d. The current price of the stock is $21. Using the growth rate (g) from part a and (D₁) from part c, compute Ke- Note: Do not round Intermediate calculations. Input your answer as a percent rounded to 2 decimal places. % e. If the flotation cost is $3.00, compute the cost of new common stock (K) using growth rate (g) from part a and dividend (D1) from part c. Note: Do not round Intermediate calculations. Input your answer as a percent rounded to 2 decimal places. Kn % What is the present value of the following? Use Appendix B as an approximate answer, but calculate your final answer using the formula and financial calculator methods. a. $8,000 in 13 years at 8 percent? Note: Do not round Intermediate calculations. Round your final answer to 2 decimal places. Present value 2,940.87 b. $18,000 in 7 years at 9 percent? Note: Do not round Intermediate calculations. Round your final answer to 2 decimal places. Present value c. $27,800 in 18 years at 10 percent? Note: Do not round Intermediate calculations. Round your final answer to 2 decimal places. Present value a. What is the present value of $280,000 to be received after 40 years with a 16 percent discount rate? Use Appendix B as an approximate answer, but calculate your final answer using the formula and financial calculator methods. Note: Do not round Intermediate calculations. Round your final answer to 2 decimal places. Present value Answer is not complete. b. Would the present value of the funds in part a be enough to buy a $800 concert ticket? Ⓒ No Yes You will receive $8,500 three years from now. The discount rate is 10 percent. a. What is the value of your investment two years from now? Multiply $8,500 × (1/1.10) or divide by 1.10 (one year's discount rate at 10 percent). Note: Do not round Intermediate calculations. Round your answer to 2 decimal places. Value of investment b. What is the value of your investment one year from now? Multiply your answer to part a by (1/1.10). Note: Do not round Intermediate calculations. Round your answer to 2 decimal places. Value of investment c. What is the value of your investment today? Multiply your answer to part b by (1/1.10). Note: Do not round Intermediate calculations. Round your answer to 2 decimal places. Value of investment d. Use the formula PV = FV × (1/(1+") to find the present value of $8,300 received three years from now at 10 percent interest. Note: Do not round Intermediate calculations. Round your answer to 2 decimal places. Present value A brilliant young scientist is killed in a plane crash. It is anticipated that he could have earned $390,000 a year for the next 20 years. The attorney for the plaintiff's estate argues that the lost income should be discounted back to the present at 7 percent. The lawyer for the defendant's insurance company argues for a discount rate of 13 percent. What is the difference between the present value of the settlement at 7 percent and 13 percent? Compute each one separately. Use Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. Note: Do not round Intermediate calculations. Round your answers to 2 decimal places. PV at 7% rate PV at 13% rate Difference Present Value $ 0.00 The treasurer of Riley Coal Company is asked to compute the cost of fixed income securities for her corporation. Even before making the calculations, she assumes the aftertax cost of debt is at least 2 percent less than that for preferred stock. Debt can be issued at a yield of 11.4 percent, and the corporate tax rate is 30 percent. Preferred stock will be priced at $63 and pay a dividend of $5.50. The flotation cost on the preferred stock is $8. a. Compute the aftertax cost of debt. Note: Do not round Intermediate calculations. Input your answer as a percent rounded to 2 decimal places. Aftertax cost of debt 7.98 % b. Compute the aftertax cost of preferred stock. Note: Do not round Intermediate calculations. Input your answer as a percent rounded to 2 decimal places. Aftertax cost of preferred stock % c. Based on the facts given above, is the treasurer correct? Yes, the treasurer is correct. O No, the treasurer is incorrect. Brook's Window Shields Incorporated is trying to calculate its cost of capital for use in a capital budgeting decision. Mr. Glass, 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 10.2 percent coupon rate and another bond with a 7.5 percent coupon 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 $54 and an expected dividend (D₁) of $5.70 per share. The firm's historical growth rate of earnings and dividends per share has been 7.5 percent, but security analysts on Wall Street expect this growth to slow to 5 percent in future years. The preferred stock is selling at $50 per share and carries a dividend of $4.75 per share. The corporate tax rate is 40 percent. The flotation cost is 2.5 percent of the selling price for preferred stock. The optimum capital structure is 30 percent debt, 10 percent preferred stock, and 60 percent common equity in the form of retained earnings. a. Compute the cost of capital for the individual components in the capital structure. Note: Do not round Intermediate calculations. Input your answers as a percent rounded to 2 decimal places. Weighted Cost % Debt Preferred stock Common equity b. Calculate the weighted cost of each source of capital and the weighted average cost of capital. Note: Do not round Intermediate calculations. Input your answers as a percent rounded to 2 decimal places. Debt Preferred stock Common equity Weighted Cost 96 Weighted average cost of capital 0.00 % Business has been good for Keystone Control Systems, as indicated by the eleven-year growth in earnings per share. The earnings have grown from $1.00 to $2.58. a. Determine the compound annual rate of growth in earnings (n = 11). Note: Do not round Intermediate calculations. Input your answer as a percent rounded to 2 decimal places. Compound annual rate of growth % b. Based on the growth rate determined in part a, project earnings for next year (E1). Note: Do not round Intermediate calculations. Round your answer to 2 decimal places. E₁₁ c. Assume the dividend payout ratio is 35 percent. Compute D₁. Note: Do not round Intermediate calculations. Round your answer to 2 decimal places. d. The current price of the stock is $21. Using the growth rate (g) from part a and (D₁) from part c, compute Ke- Note: Do not round Intermediate calculations. Input your answer as a percent rounded to 2 decimal places. % e. If the flotation cost is $3.00, compute the cost of new common stock (K) using growth rate (g) from part a and dividend (D1) from part c. Note: Do not round Intermediate calculations. Input your answer as a percent rounded to 2 decimal places. Kn % What is the present value of the following? Use Appendix B as an approximate answer, but calculate your final answer using the formula and financial calculator methods. a. $8,000 in 13 years at 8 percent? Note: Do not round Intermediate calculations. Round your final answer to 2 decimal places. Present value 2,940.87 b. $18,000 in 7 years at 9 percent? Note: Do not round Intermediate calculations. Round your final answer to 2 decimal places. Present value c. $27,800 in 18 years at 10 percent? Note: Do not round Intermediate calculations. Round your final answer to 2 decimal places. Present value a. What is the present value of $280,000 to be received after 40 years with a 16 percent discount rate? Use Appendix B as an approximate answer, but calculate your final answer using the formula and financial calculator methods. Note: Do not round Intermediate calculations. Round your final answer to 2 decimal places. Present value Answer is not complete. b. Would the present value of the funds in part a be enough to buy a $800 concert ticket? Ⓒ No Yes You will receive $8,500 three years from now. The discount rate is 10 percent. a. What is the value of your investment two years from now? Multiply $8,500 × (1/1.10) or divide by 1.10 (one year's discount rate at 10 percent). Note: Do not round Intermediate calculations. Round your answer to 2 decimal places. Value of investment b. What is the value of your investment one year from now? Multiply your answer to part a by (1/1.10). Note: Do not round Intermediate calculations. Round your answer to 2 decimal places. Value of investment c. What is the value of your investment today? Multiply your answer to part b by (1/1.10). Note: Do not round Intermediate calculations. Round your answer to 2 decimal places. Value of investment d. Use the formula PV = FV × (1/(1+") to find the present value of $8,300 received three years from now at 10 percent interest. Note: Do not round Intermediate calculations. Round your answer to 2 decimal places. Present value A brilliant young scientist is killed in a plane crash. It is anticipated that he could have earned $390,000 a year for the next 20 years. The attorney for the plaintiff's estate argues that the lost income should be discounted back to the present at 7 percent. The lawyer for the defendant's insurance company argues for a discount rate of 13 percent. What is the difference between the present value of the settlement at 7 percent and 13 percent? Compute each one separately. Use Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. Note: Do not round Intermediate calculations. Round your answers to 2 decimal places. PV at 7% rate PV at 13% rate Difference Present Value $ 0.00 The treasurer of Riley Coal Company is asked to compute the cost of fixed income securities for her corporation. Even before making the calculations, she assumes the aftertax cost of debt is at least 2 percent less than that for preferred stock. Debt can be issued at a yield of 11.4 percent, and the corporate tax rate is 30 percent. Preferred stock will be priced at $63 and pay a dividend of $5.50. The flotation cost on the preferred stock is $8. a. Compute the aftertax cost of debt. Note: Do not round Intermediate calculations. Input your answer as a percent rounded to 2 decimal places. Aftertax cost of debt 7.98 % b. Compute the aftertax cost of preferred stock. Note: Do not round Intermediate calculations. Input your answer as a percent rounded to 2 decimal places. Aftertax cost of preferred stock % c. Based on the facts given above, is the treasurer correct? Yes, the treasurer is correct. O No, the treasurer is incorrect. Brook's Window Shields Incorporated is trying to calculate its cost of capital for use in a capital budgeting decision. Mr. Glass, 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 10.2 percent coupon rate and another bond with a 7.5 percent coupon 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 $54 and an expected dividend (D₁) of $5.70 per share. The firm's historical growth rate of earnings and dividends per share has been 7.5 percent, but security analysts on Wall Street expect this growth to slow to 5 percent in future years. The preferred stock is selling at $50 per share and carries a dividend of $4.75 per share. The corporate tax rate is 40 percent. The flotation cost is 2.5 percent of the selling price for preferred stock. The optimum capital structure is 30 percent debt, 10 percent preferred stock, and 60 percent common equity in the form of retained earnings. a. Compute the cost of capital for the individual components in the capital structure. Note: Do not round Intermediate calculations. Input your answers as a percent rounded to 2 decimal places. Weighted Cost % Debt Preferred stock Common equity b. Calculate the weighted cost of each source of capital and the weighted average cost of capital. Note: Do not round Intermediate calculations. Input your answers as a percent rounded to 2 decimal places. Debt Preferred stock Common equity Weighted Cost 96 Weighted average cost of capital 0.00 %
Expert Answer:
Related Book For
Foundations of Financial Management
ISBN: 978-1259194078
15th edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen
Posted Date:
Students also viewed these finance questions
-
Business has been good for Keystone Control Systems, as indicated by the four-year growth in earnings per share. The earnings have grown from $1.00 to $1.63. a. Use Appendix A at the back of the text...
-
The treasurer of Kelly Bottling Company (a corporation) currently has $200,000 invested in preferred stock yielding 10 percent. He appreciates the tax advantages of preferred stock and is considering...
-
Use lHospitals rule where applicable to find each limit. lim In(ex + 1) 5x
-
Identify three factors that can shift the aggregate demand curve to the right and three different factors that can shift the aggregate demand curve to the left.
-
An experimenter has run a single replicate of a 24 design. The following effect estim have been calculated: (a) Construct a normal probability plot of these effects. (b) Identify a tentative model,...
-
Andrew Reitz established a trust in 2000, naming his sons, James and John, as sole beneficiaries and himself as trustee. Upon Andrews death, Hal Rachal Jr., the attorney who drafted the trust, became...
-
(Entries for Bond TransactionsStraight-Line) Foreman Company issued $800,000 of 10%, 20-year bonds on January 1, 2011, at 102. Interest is payable semiannually on July 1 and January 1. Foreman...
-
asap please 1. Determine a maintenance priority by calculating Preventive Maintenance Factors (PMFs) for the three pieces of equipment listed in the table below. Clearly state which piece of...
-
Lox, Stock and Bagel Company (LSB) is determining its cost of capital. It uses a risk free, medium term bank loan and equity financing. Part a: The current balance on the bank loan is $8,000,000. It...
-
The following plan belongs to a two-story building; Design S1-59 slabs in terms of thickness (h, d) and reinforcement (As, s) based on the following considerations: Material C35/S420 Cover = 25 mm...
-
#include int main () { double x = 1, y = 1; while ((((x + 1.0) x) 1.0) == 0.0) { } X * = 2.0; printf ("xu-u%. 15euu ", x); } while ((((x + y) { x) - y) != 0.0) y += 1.0; printf ("yu-u%.15 eu ", y); }...
-
4. What are the overflow and carry flags of the following operations? (Assume a four-bit system.) 1101 + 1100 1101-1100 1100 + 1010 0100-0110 0100 +0010 0100+0110 1100-0110 Carry Overflow
-
Explain the internal influences of electronic health records, what they are and how they impact organizational behavior
-
After watching the Video clips, Assess if it has an impact in both social and physical aspects of you as a student or if ever you are a businessman today as we face the covid-19 pandemic/ as we shift...
-
3- Suppose that the government is running a balanced budget and the value of purchases made by the government is 200. The consumption function is C = 200 + 0.6 Yd and planned investment is 100. b)...
-
Dunder Mifflin Paper Company, Inc. is a paper sales company with multiple branches throughout the United States. Michael Scott, branch manager out of Scranton, Pennsylvania, decided to quit and open...
-
A firm offers two products for sale. The marginal cost of one product is new zero once the first unit has been produced. The marginal cost of the other product rises as output rises. What would be...
-
What are the important administrative considerations in the capital budgeting process?
-
Midland Petroleum is holding a stockholders meeting next month. Ms. Ramsey is the president of the company and has the support of the existing board of directors. All 12 members of the board are up...
-
You are asked to evaluate the following two projects for the Norton Corporation. Using the net present value method combined with the profitability index approach described in footnote 2 of this...
-
Refer to the latest financial report of JB Hi-Fi Limited on its website, www.jbhifi.com.au, and answer the following questions. 1. Is it likely that JB Hi-Fi Limited would have to confront such...
-
Imelda Instruments Ltd manufactures two products: missile range instruments and space pressure gauges. During January, 53 range instruments and 360 pressure gauges were produced, and overhead costs...
-
Swiss Chocolates Ltd produces blocks of chocolate. Raw materials in the form of cocoa solids, milk and sugar are added at the beginning of the process, flavouring, fruit and nuts are added half-way...
Study smarter with the SolutionInn App