1. The firm can raise debt by selling $5,000-par-value, 8% coupon interest rate, 20-year bonds on...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
1. The firm can raise debt by selling $5,000-par-value, 8% coupon interest rate, 20-year bonds on which annual interest payments will be made. To sell the issue, an average discount of $30 per bond would have to be given. The firm also must pay flotation costs of $30 per bond. If the tax rate is 35%, what is the after-tax cost of debt? 4 points 2. Mavis Taylor Corporation has just issued preferred stock. The stock has a 6% annual dividend and a $100 par value, and was sold at $98.5 per share. Flotation costs were an additional $3 per share. a. Calculate the cost of the preferred stock. 2 points b. If the firm sells the preferred stock with a 10% annual dividend and net $93.00 after flotation costs, what is its cost? 2.5 points 3. Jones Corp. paid a $3.50 dividend last year. At a constant growth rate of 5 percent, what is the value of the common stock if the investors require a 20 percent rate of return? If the required rate of return decreases by 3%, what will be the value of the stock? 2.5 points 4. The common stock for the Great Eastern Corporation sells for $58 a share. Last year the firm paid a $4 dividend, which is expected to continue to grow 4.5 percent per year into the indefinite future. If the firm's tax rate is 22 percent, what is the firm's cost of common equity? 3 points 5. You are working as a consultant to the Crawford Company, and 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: Source of Capital Market Value Bonds Preferred stock Common stock $350,000 $600,000 $540,000 To finance the purchase, Crawford will sell 20-year bonds with a $1,000 par value paying 6 percent per year (with interest paid annually) at the market price of $1,045. Preferred stock paying a $2.50 dividend can be sold for $35. Common stock for Crawford is currently selling for $50 per share. The firm paid a $5.25 dividend last year and expects dividends to continue growing at a rate of 4 percent per year for the indefinite future. The firm's marginal tax rate is 34 percent. What discount rate should you use to evaluate the warehouse project (compute for WACC 2.5 points)? Please compute first for the individual costs of the following: preferred stock - 2 points, Equity - 2.5 points, and debt 3.5 points) 1. The firm can raise debt by selling $5,000-par-value, 8% coupon interest rate, 20-year bonds on which annual interest payments will be made. To sell the issue, an average discount of $30 per bond would have to be given. The firm also must pay flotation costs of $30 per bond. If the tax rate is 35%, what is the after-tax cost of debt? 4 points 2. Mavis Taylor Corporation has just issued preferred stock. The stock has a 6% annual dividend and a $100 par value, and was sold at $98.5 per share. Flotation costs were an additional $3 per share. a. Calculate the cost of the preferred stock. 2 points b. If the firm sells the preferred stock with a 10% annual dividend and net $93.00 after flotation costs, what is its cost? 2.5 points 3. Jones Corp. paid a $3.50 dividend last year. At a constant growth rate of 5 percent, what is the value of the common stock if the investors require a 20 percent rate of return? If the required rate of return decreases by 3%, what will be the value of the stock? 2.5 points 4. The common stock for the Great Eastern Corporation sells for $58 a share. Last year the firm paid a $4 dividend, which is expected to continue to grow 4.5 percent per year into the indefinite future. If the firm's tax rate is 22 percent, what is the firm's cost of common equity? 3 points 5. You are working as a consultant to the Crawford Company, and 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: Source of Capital Market Value Bonds Preferred stock Common stock $350,000 $600,000 $540,000 To finance the purchase, Crawford will sell 20-year bonds with a $1,000 par value paying 6 percent per year (with interest paid annually) at the market price of $1,045. Preferred stock paying a $2.50 dividend can be sold for $35. Common stock for Crawford is currently selling for $50 per share. The firm paid a $5.25 dividend last year and expects dividends to continue growing at a rate of 4 percent per year for the indefinite future. The firm's marginal tax rate is 34 percent. What discount rate should you use to evaluate the warehouse project (compute for WACC 2.5 points)? Please compute first for the individual costs of the following: preferred stock - 2 points, Equity - 2.5 points, and debt 3.5 points)
Expert Answer:
Answer rating: 100% (QA)
1 The aftertax cost of debt is calculated as follows The pretax cost of debt 8 coupon interest rate ... View the full answer
Related Book For
Principles of managerial finance
ISBN: 978-0132479547
12th edition
Authors: Lawrence J Gitman, Chad J Zutter
Posted Date:
Students also viewed these accounting questions
-
Jones Brothers Clothing just issued preferred stock with a face value equal to $80 that pays a 10 percent annual dividend. If the stock currently yields 8 percent, what is its market value?
-
Annual contributions of $1000 will be made to a TFSA for 25 years. The contributor expects investments within the plan to earn 7% compounded annually. What will the TFSA be worth after 25 years if...
-
The Shamrock Corporation has just issued a $1,000 par value zero-coupon bond with an 8 percent yield to maturity, due to mature 15 years from today (assume semiannual compounding). a. What is the...
-
A function f(x) is said to have a jump discontinuity at x = a if: 1. lim f(x) exists. xa 2. lim f(x) exists. xa 3. The left and right limits are not equal. Let f(x) = 5x7, if x < 2 1 if x 2 x + 9'...
-
Sanjay Kumar, the former chief executive of CA Inc., pleaded guilty to securities fraud and obstruction of justice charges stemming from a scheme that used backdated contracts to falsify the U.S....
-
Discuss the reasons why the centralized mass production of services is challenging.
-
Describe the six categories of early warning signs of potential fraud.
-
Carole Dahl is chief financial officer of the Phoenix Division of Dahl Corporation, a multinational company with three operating divisions. As part of the budgeting process, Dahl's staff is...
-
A 1 kg metal block is heated to 200 C and then dropped into a thermally isolated container with 4 kg of water and 100 gr of ice both at a temperature of 0 C. If the specific heat of water is cw=4186...
-
Consider the following linear programming problem Max 8X + 7Y s.t. 15X + 5Y < 75 10X + 6Y < 60 X + Y < 8 X, Y 0 a. Use a graph to show each constraint and the feasible region. b. Identify the...
-
It is becoming more and more difficult to recruit senior technical specialists for many job roles and industries in lowered mainland.Considerthe elements of a recruitment action plan:...
-
Water is being pushed through a pipe that has a 5 cm diameter at a rate of 2.0 cm/s. The pipe then enters a constriction as goes down to a smaller pipe of 3.0 cm in diameter. How fast is the water...
-
A ball with a mass of 0.50 kg and a speed of 6 m/s collides perpendicularly with a wall and bounces off with a speed of 4 m/s in the opposite direction. What is the magnitude of the impulse acting on...
-
A light source with an intensity I, is shining on a sequence of polarizers. What will be the intensity on the other side of the first polarizer? Now imagine that you place a second polarizer behind...
-
You are thinking about taking gymnastics, so you go to the facility and get an idea of what to expect by looking out from the viewing room. The viewing room window is 2.00 m above the trampoline...
-
Two spherical, nonconducting, and very thin shells of uniformly distributed positive charge Q and radius d are located a distance 12d from each other. A positive point charge q is placed inside one...
-
Manufacturer's Inc. estimates that its interest charges for this year will be $700 and its net income will be $3,000. Assuming its average tax rate is 30 percent, what is the company's estimated...
-
If the annual fixed costs are 54,000 dinars, the occupation expense represents 20%, the contribution margin is 25%, and the unit selling price is 40 dinars. Required: Calculate the closing point of...
-
Free cash how is often considered a more reliable measure of a companys income than reported earnings. What are same possible ways that corporate accountants might be able to change their earnings to...
-
What is the difference between the accounting and finance definitions of operating cash flow? Under what circumstances are they the same?
-
An Iowa state savings bond can be converted to $100 at maturity 6 years from purchase. If the state bonds are to be competitive with U.S. savings bonds, which pay 8% annual interest (compounded...
-
Portugal has a progressive personal income tax system. In 2016, tax rates on taxable income were \(14.5 \%\) on the first \( 7,035,21 \%\) on the next \( 13,065,37 \%\) on the next \( 20,100,45 \%\)...
-
In its 2016 International Tax Competitiveness Index report, the U.S.-based Tax Foundation ranked Estonia as having the most competitive tax system in the OECD, based in part on its \(20 \%\) flat tax...
-
A lump-sum tax is a fixed amount of tax per person. If a lump-sum tax, \(T\), raises the same amount of revenue for the government as a tax on earnings at the rate, \(t\), then \(t w H=T\), where...
Study smarter with the SolutionInn App