Accounting (15 points) Timel Company is in the process of determining its capital budget for the...
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Accounting (15 points) Timel Company is in the process of determining its capital budget for the coming fiscal year. Timel Company's balance sheet reflects five sources of long-term funds. The current outstanding amounts from these five sources are shown below and represent the company's historical sources of funds fairly accurately. Mortgage bonds Debenture bonds Preferred stock Common equity Source of Funds Source of Funds Mortgage bonds Debentures Timel will raise the funds necessary to support the selected capital investment projects so as to maintain its historical distribution among the various sources of long-term funds. Thus, 15% will be obtained from additional mortgage bonds on new plant, 25% from debentures (a generic type of bonds), 10% from preferred stock, and 50% from some common equity source. Timel's policy is to reinvest the funds from each year's earnings in new projects. Timel issues new common stock only after all funds provided from retained earnings have been exhausted. Preferred stock Common stock Management estimates that its net income after taxes for the coming year will be $4.50 per common share (for 15 million shares). The dividend payout ratio will be 40% of earnings to common shareholders, the same ratio as the prior 4 years. The preferred stock holders will receive $6.75 million. The earnings retained will be used as needed to support the capital market. $ Amount (in Millions) 135 225 90 450 900 Par Value ($) 1,000 1,000 100 10 % 15 25 10 50 100 Characteristics 30 year, 7% %, annual payment 25 year, 8%, semi-annual payment 7% Issue Price ($) 980.00 1,100.00 99.25 67.50 The estimated interest rates on the debt instruments and the dividend rate on the preferred stock are based upon the rates being experienced in the market by firms that are of the same size and quality as Timel. The investment banker estimated Timel's annual growth rate to be 10%. In addition, the bank is charging Timel a floatation cost of 7% for its common and preferred equities offering but nothing for its debt offerings. Timel is subject to a 35% income tax rate. 1. Calculate Timel s after-tax marginal cost of capital for each of the five sources of capital. (10 pts) 2. Calculate Timel s after-tax weighted average cost of capital. (3 pts) 3. Timel follows the practice that 50 percent of any funds raised will be derived from ordinary equity sources. Determine the point of expansion at which Timel s source of ordinary equity funds would switch from retained earnings to new ordinary stock in the coming year. (5 pts) Accounting (15 points) Timel Company is in the process of determining its capital budget for the coming fiscal year. Timel Company's balance sheet reflects five sources of long-term funds. The current outstanding amounts from these five sources are shown below and represent the company's historical sources of funds fairly accurately. Mortgage bonds Debenture bonds Preferred stock Common equity Source of Funds Source of Funds Mortgage bonds Debentures Timel will raise the funds necessary to support the selected capital investment projects so as to maintain its historical distribution among the various sources of long-term funds. Thus, 15% will be obtained from additional mortgage bonds on new plant, 25% from debentures (a generic type of bonds), 10% from preferred stock, and 50% from some common equity source. Timel's policy is to reinvest the funds from each year's earnings in new projects. Timel issues new common stock only after all funds provided from retained earnings have been exhausted. Preferred stock Common stock Management estimates that its net income after taxes for the coming year will be $4.50 per common share (for 15 million shares). The dividend payout ratio will be 40% of earnings to common shareholders, the same ratio as the prior 4 years. The preferred stock holders will receive $6.75 million. The earnings retained will be used as needed to support the capital market. $ Amount (in Millions) 135 225 90 450 900 Par Value ($) 1,000 1,000 100 10 % 15 25 10 50 100 Characteristics 30 year, 7% %, annual payment 25 year, 8%, semi-annual payment 7% Issue Price ($) 980.00 1,100.00 99.25 67.50 The estimated interest rates on the debt instruments and the dividend rate on the preferred stock are based upon the rates being experienced in the market by firms that are of the same size and quality as Timel. The investment banker estimated Timel's annual growth rate to be 10%. In addition, the bank is charging Timel a floatation cost of 7% for its common and preferred equities offering but nothing for its debt offerings. Timel is subject to a 35% income tax rate. 1. Calculate Timel s after-tax marginal cost of capital for each of the five sources of capital. (10 pts) 2. Calculate Timel s after-tax weighted average cost of capital. (3 pts) 3. Timel follows the practice that 50 percent of any funds raised will be derived from ordinary equity sources. Determine the point of expansion at which Timel s source of ordinary equity funds would switch from retained earnings to new ordinary stock in the coming year. (5 pts)
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Answer rating: 100% (QA)
1 Calculation of Timels AfterTax Marginal Cost of Capital a Mortgage Bonds Coupon Rate 7 Tax Rate 35 AfterTax Cost of Debt ATCD Coupon Rate 1 Tax Rate ... View the full answer
Related Book For
Intermediate Accounting
ISBN: 978-0324300987
10th Edition
Authors: Loren A Nikolai, D. Bazley and Jefferson P. Jones
Posted Date:
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