Fairfield Office Supplies Inc. has a regional chain of office supply stores in the Midwest. Fairfield...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Fairfield Office Supplies Inc. has a regional chain of office supply stores in the Midwest. Fairfield is trying to compete with the large nationwide office supply companies. It is January of 2013 and Fairfield needs to make some capital budgeting decisions this year. They need to decide whether to replace their computerized inventory system or upgrade the old one, whether to purchase two stores from a sole proprietor or not, whether to keep, abandon or modernize one of the stores, which new copiers to purchases and a few other small projects. The company is under some pressure and has a strict capital budget of $11 million, so they need to be careful as to which projects they choose. Examine the following book-value balance sheet for Fairfield Office supplies for the year 2012. What is the capital structure of the firm based on market values? The preferred stock currently sells for $5.75 per share and the common stock for $17.00 per share. The preferred stock pays a dividend of $.65 per share, the Common Stock paid a dividend of $1.10 last year, and the firm is expected to continue to grow at the same rate as the net income for the past five years, The rate on 90 day treasuries is 1.90%, the beta of the stock is 1.5, the market risk premium is 8%, and the firm's tax rate is 40%. The float costs are as follows: Debt: 10% of par, preferred: $0.5 per share and Common: $2.00 per share. The firm has paid out 25% of its net income as dividend in the past five years and is expected to continue. If the company borrows over $1.0 million then the cost of debt goes from 10.0% to 12.5% (including flotation) and if the company borrows over $2 million the cost goes to 14% (including flotation). Find the Marginal costs of capital for Fairfield. Fairfield tax rate is 40%. (For Required return of retained earnings use an average of the DCF method and the CAPM method). Fairfield Office Supplies Inc. has a regional chain of office supply stores in the Midwest. Fairfield is trying to compete with the large nationwide office supply companies. It is January of 2013 and Fairfield needs to make some capital budgeting decisions this year. They need to decide whether to replace their computerized inventory system or upgrade the old one, whether to purchase two stores from a sole proprietor or not, whether to keep, abandon or modernize one of the stores, which new copiers to purchases and a few other small projects. The company is under some pressure and has a strict capital budget of $11 million, so they need to be careful as to which projects they choose. Examine the following book-value balance sheet for Fairfield Office supplies for the year 2012. What is the capital structure of the firm based on market values? The preferred stock currently sells for $5.75 per share and the common stock for $17.00 per share. The preferred stock pays a dividend of $.65 per share, the Common Stock paid a dividend of $1.10 last year, and the firm is expected to continue to grow at the same rate as the net income for the past five years, The rate on 90 day treasuries is 1.90%, the beta of the stock is 1.5, the market risk premium is 8%, and the firm's tax rate is 40%. The float costs are as follows: Debt: 10% of par, preferred: $0.5 per share and Common: $2.00 per share. The firm has paid out 25% of its net income as dividend in the past five years and is expected to continue. If the company borrows over $1.0 million then the cost of debt goes from 10.0% to 12.5% (including flotation) and if the company borrows over $2 million the cost goes to 14% (including flotation). Find the Marginal costs of capital for Fairfield. Fairfield tax rate is 40%. (For Required return of retained earnings use an average of the DCF method and the CAPM method).
Expert Answer:
Answer rating: 100% (QA)
o calculate the marginal costs of capital for Fairfield Office Supplies we need to determine the required return for each component of the companys ca... View the full answer
Related Book For
Statistics For Managers Using Microsoft Excel
ISBN: 9780133130805
7th Edition
Authors: David M. Levine, David F. Stephan, Kathryn A. Szabat
Posted Date:
Students also viewed these finance questions
-
Planning is one of the most important management functions in any business. A front office managers first step in planning should involve determine the departments goals. Planning also includes...
-
Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...
-
Skid more Company sold merchandise on July 1, 2007 to Joseph Company, accepting a $100,000 down payment and a 8% note payable for the balance of $400,000. The cost of the merchandise to Skid more was...
-
Mirage Company's July 1 inventory had a cost of $60,100 and a retail value of $74,100. During July, net purchases cost $256,600 with a retail value of $406,000. Net sales at retail for Mirage Company...
-
In Problem, graph f, locate all points of discontinuity, and discuss the behavior of f at these points. if x 0 f(x) = 0 1+x ifx = 0 if x >0
-
Brian Rafferty ingested finasteride, a drug prescribed to him to treat an enlarged prostate. Finasteride is a generic version of Proscar, a drug manufactured by Merck. Some time after he started to...
-
The chart of accounts of LR Company includes the following selected accounts. 112 Accounts Receivable ......401 Sales Revenue 120 Inventory ...........412 Sales Returns and Allowances 126 Supplies...
-
W (K$) 14 13 Rich 12 11 10 9 8 7 6 5 Poor W (K$) 14 13 12 11 10 9 8 7 6 5 4 16 18 20 22 24 26 28 17 19 21 L 20 22 24 26 23 25 27 (M) 21 23 25 27 29 31 28 30 32 34 36 L 33 35 37 (M) 1. There are two...
-
Suppose a banking company decides to add insurance services to its existing products menu It expects to earn a 15 percent average return from sales of its traditional banking products and a 25...
-
The change in the value of a portfolio in one month is normally distributed with a mean of zero and a standard deviation of $4.5 million. Note the confidence level is 96.5% and a time horizon is of...
-
3. A vertical radio antenna is to be built on a hillside (with a 10.2 slope). (2 marks) A wire is to be attached at a point 18 meters up the antenna, and at a point 15 meters from the base of the...
-
How does the dual-process theory of reasoning apply to managerial decision-making in high-stakes business environments?
-
Amber Zahner's insurance company, the Rentin Group, charges $468 a year for $118,000 insurance coverage on her home. The Union Street Insurance Company quoted Amber a rate of $0.41 per $100 for the...
-
How do advances in materials science, digital fabrication, and additive manufacturing technologies influence the future trajectory of ceramic art, and what implications do these technological...
-
Solve the following LPP Maximize z=40x1+35x2 Subject to 2x1+3x260 4x1+3x296 x1,x20
-
7 A 29-year-old, previously healthy man suddenly collapses at a party where legal and illicit drugs are being used. Enroute to the hospital, he requires resuscitation with defibrillation to establish...
-
An orange juice producer buys all his oranges from a large orange grove. The amount of juice squeezed from each of these oranges is approximately normally distributed, with a mean of 4.70 ounces and...
-
The U.S. Department of Education reports that 40% of full-time college students are employed while attending college. (Data extracted from National Center for Education Statistics, The Condition of...
-
The file Property Taxes contains the property taxes per capita for the 50 states and the District of Columbia. a. Compute the mean, median, first quartile, and third quartile. b. Compute the range,...
-
The mean height of American males is 69.5 inches. The heights of the 43 male U.S. presidents* (Washington through Obama) have a mean 70.78 inches and a standard deviation of 2.77 inches. Treating the...
-
Contrast the assumptions for a finite distributed lag model with those for an infinite distributed lag model.
-
Compute delay, interim, and total multipliers for finite and infinite distributed lag models.
Study smarter with the SolutionInn App