TRM Consulting Services currently has the following capital structure: Source Book Value Quantity Common Stock........................ $ 8,500,000.....................

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TRM Consulting Services currently has the following capital structure:

Source Book Value Quantity

Common Stock........................ $ 8,500,000..................... 350,000

Preferred Stock............................. 500,000....................... 10,000

Debt........................................ 4,000,000........................ 4,000

Debt is represented by 15-year original maturity bonds, issued five years ago, with a coupon rate of 8%, and are currently selling for $965. The bonds pay interest semiannually. The preferred stock pays a $5 dividend annually and is currently valued at $60 per share. Flotation costs on debt and preferred equity are negligible and can be ignored, but they will be 8% of the selling price for common stock. The common stock, which can be bought for $32.00, has experienced a 5% annual growth rate in dividends and is expected to pay a $1.50 dividend next year. In addition, the firm expects to have $150,000 of retained earnings. Assume that TRM's marginal tax rate is 35%.

a. Set up a worksheet with all of the data from the problem in a well organized input area.

b. Calculate the book-value weights for each source of capital.

c. Calculate the market-value weights for each source of capital.

d. Calculate the component costs of capital (i.e., debt, preferred equity, retained earnings, and new common equity).


e. Calculate the weighted average costs of capital using both the market value and book-value weights.

Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a...
Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...
Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest...
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Financial Analysis with Microsoft Excel

ISBN: 978-1111826246

6th edition

Authors: Timothy R. Mayes, Todd M. Shank

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