Question 3: A company finances its operations with half debt and half common equity, earning net...

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Question 3: A company finances its operations with half debt and half common equity, earning net income of $30 million with dividend payout ratio of 20%. Its capital budget is $40 million, and the interest rate on debt is 10%, subject to 40% tax rate. The company's common stock trades at $66 per share currently, based on current dividend of $4 per share, which is expected to grow at a constant rate of 10% per year. The flotation cost of external equity, if issued, will be 5%. Required: a) Will the company have to issue external equity? b) Based on your answer to 'a', what is the company's WACC? Question 4: A company finances its operations with 2/3 debt to common equity ratio, earning net income of $12 million with dividend payout ratio of 30%. Its capital budget is $15 million, and the annual yield on its debt is 7%, subject to 35% tax rate. The company's common stock trades at $55 per share currently, based on current dividend of $5 per share, which is expected to grow at a constant rate of 8% per year. The flotation cost of external equity, if issued, will be 4%. Based on that, what is the company's WACC? Question 5: Adhesion Inc. is currently evaluating an expansion plan for its operations using an eight-year planning horizon. If the plan is accepted, then a new plant will be built at a cost of $2,500,000 on a vacant lot owned by Adhesion. The land originally cost Adhesion $400,000, although its current market value is $750,000. The expansion plan also requires the purchase of a new machine at a cost of $800,000. This new machine has an annual production capacity of 160,000 units. Installation of the machine will cost an additional $50,000. Finally, an investment of $100,000 in working capital will be required for the operation of the new plant. Based on its current business, management believes that there is market demand for an additional 200,000 units of its product annually at the current price of $15 per unit. Direct costs of production are estimated to be $8 per unit. Management also intends to allocate $250,000 of corporate (head office) overhead to the new plant. At the end of the eight-year planning horizon, salvage on the building is estimated to be 25% of its original cost, the salvage value of the machine is estimated at $85,000 and the anticipated market value for the land is $900,000. If Adhesion's marginal tax rate is 32%, its cost of capital is 14% and the CCA rates on the building and the machine are 7.5% and 15%, respectively, then should Adhesion implement the expansion plan? How many minimum units must Adhesion produce and sell in order for the plan to be worthwhile? Question 6: An all-equity firm just paid $4 per share dividend and for foreseeable future, will reinvest 65% of its earnings in projects that are expected to provide 10% RoR forever. If the treasury yield is 1.5%, the market risk premium is 7% and the firm's beta is 1.5, then calculate the firm's EPS and Share Price. What is the present value of the growth opportunities for the firm? If the growth can be achieved with debt at 5%, such that D:E ratio = 1:2, then what would the share price be? If needed, then assume that the firm's income is subject to a 30% tax rate. Question 1: NASA Inc. has 40 million shares outstanding, selling at $20 per share, and a D:E ratio of 1:4. NASA's stock beta is 1.15, its bond rating is AA and following is some income statement data: EBIT $150 million Interest Exp. $20 million Taxes = $52 million The current risk-free rate is 8%, the market risk premium is 5.5% and AAA to AA spread is 2%. Required: a) What is the firm's current weighted average cost of capital? b) The firm is considering to borrow further $200 million of debt to repurchase stock, which will result in its bond rating dropping to A. If the AAA to A spread is 3%, then what will the new stock price and weighted average cost of capital be if the proposal is undertaken? Question 2: A firm has $45,000,000 of preferred shares outstanding that have a yield of 10% on par and are callable at a 3% premium. New issues will cost $980,000 in issuing and underwriting expenses. Required: a) At what interest rate would the firm want to refinance? b) If the dividend yield drops to 8%, then how long will it take before the present value of the interest savings exceeds the cost of refinancing? Question 3: A company finances its operations with half debt and half common equity, earning net income of $30 million with dividend payout ratio of 20%. Its capital budget is $40 million, and the interest rate on debt is 10%, subject to 40% tax rate. The company's common stock trades at $66 per share currently, based on current dividend of $4 per share, which is expected to grow at a constant rate of 10% per year. The flotation cost of external equity, if issued, will be 5%. Required: a) Will the company have to issue external equity? b) Based on your answer to 'a', what is the company's WACC? Question 4: A company finances its operations with 2/3 debt to common equity ratio, earning net income of $12 million with dividend payout ratio of 30%. Its capital budget is $15 million, and the annual yield on its debt is 7%, subject to 35% tax rate. The company's common stock trades at $55 per share currently, based on current dividend of $5 per share, which is expected to grow at a constant rate of 8% per year. The flotation cost of external equity, if issued, will be 4%. Based on that, what is the company's WACC? Question 5: Adhesion Inc. is currently evaluating an expansion plan for its operations using an eight-year planning horizon. If the plan is accepted, then a new plant will be built at a cost of $2,500,000 on a vacant lot owned by Adhesion. The land originally cost Adhesion $400,000, although its current market value is $750,000. The expansion plan also requires the purchase of a new machine at a cost of $800,000. This new machine has an annual production capacity of 160,000 units. Installation of the machine will cost an additional $50,000. Finally, an investment of $100,000 in working capital will be required for the operation of the new plant. Based on its current business, management believes that there is market demand for an additional 200,000 units of its product annually at the current price of $15 per unit. Direct costs of production are estimated to be $8 per unit. Management also intends to allocate $250,000 of corporate (head office) overhead to the new plant. At the end of the eight-year planning horizon, salvage on the building is estimated to be 25% of its original cost, the salvage value of the machine is estimated at $85,000 and the anticipated market value for the land is $900,000. If Adhesion's marginal tax rate is 32%, its cost of capital is 14% and the CCA rates on the building and the machine are 7.5% and 15%, respectively, then should Adhesion implement the expansion plan? How many minimum units must Adhesion produce and sell in order for the plan to be worthwhile? Question 6: An all-equity firm just paid $4 per share dividend and for foreseeable future, will reinvest 65% of its earnings in projects that are expected to provide 10% RoR forever. If the treasury yield is 1.5%, the market risk premium is 7% and the firm's beta is 1.5, then calculate the firm's EPS and Share Price. What is the present value of the growth opportunities for the firm? If the growth can be achieved with debt at 5%, such that D:E ratio = 1:2, then what would the share price be? If needed, then assume that the firm's income is subject to a 30% tax rate. Question 1: NASA Inc. has 40 million shares outstanding, selling at $20 per share, and a D:E ratio of 1:4. NASA's stock beta is 1.15, its bond rating is AA and following is some income statement data: EBIT $150 million Interest Exp. $20 million Taxes = $52 million The current risk-free rate is 8%, the market risk premium is 5.5% and AAA to AA spread is 2%. Required: a) What is the firm's current weighted average cost of capital? b) The firm is considering to borrow further $200 million of debt to repurchase stock, which will result in its bond rating dropping to A. If the AAA to A spread is 3%, then what will the new stock price and weighted average cost of capital be if the proposal is undertaken? Question 2: A firm has $45,000,000 of preferred shares outstanding that have a yield of 10% on par and are callable at a 3% premium. New issues will cost $980,000 in issuing and underwriting expenses. Required: a) At what interest rate would the firm want to refinance? b) If the dividend yield drops to 8%, then how long will it take before the present value of the interest savings exceeds the cost of refinancing?