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A-Rod Manufacturing Company is trying to calculate its cost of capital for use in making a capital budgeting decision. Mr. Jeter, the vice-president of finance, has given you the following information and has asked you to compute the weighted average cost of capital. The company currently has outstanding a bond with a 10.6 percent coupon rate and another bond with an 8.2 percent rate. The firm has been informed by its investment banker that bonds of equal risk and credit rating are now selling to yield 11.5 percent. The common stock has a price of $65 and an expected dividend (D1) of $1.50 per share. The historical growth pattern (g) for dividends is as follows: 1.40 1.54 1.69 1.85 The preferred stock is selling at $85 per share and pays a dividend of $8.50 per share. The corporate tax rate is 40 percent. The flotation cost is 2.6 percent of the selling price for preferred stock. The optimum capital structure for the firm is 35 percent debt, 5 percent preferred stock, and 60 percent common equity in the form of retained earnings. (a) Compute the historical growth rate. (Round your intermediate calculations to 2 decimal places and final answer to the nearest whole percent. Omit the "%" sign in your response.) Growth rate % (b) Compute the cost of capital for the individual components in the capital structure. (Round growth rate to nearest whole percent. Round your answers to 2 decimal places. Omit the "%" sign in your response.) Cost of capital Debt (Kd) % Preferred stock (Kp) Common equity (Ke) (c) Calculate the weighted cost of each source of capital and the weighted average cost of capital. (Round your intermediate calculations and final answers to 2 decimal places. Omit the "%" sign in your response.) Weighted cost Debt (Kd) % Preferred stock (Kp) Common equity (Ke) Weighted average cost of capital (Ka) %
ABC Corporation is investing $500 million in production facilities. The present value of all future cash flows is estimated to be $700 million. Assume that all cash flows are aftertax. ABC has 180 million outstanding shares with a current market pric..
Louise Manufacturing uses 2,300 switch assemblies per week and then reorders another 2,300. The relevant carrying cost per switch assembly is $9.00, and the fixed order cost is $1,150. What are the current carrying costs?
Analyse the value of Caraway's equity if it pays out a $200,000 cash dividend today and plans to pay a $1.2 million liquidating dividend at the end of one year.
At December 31, 2014, Sager Co. had 1,200,000 shares of common stock outstanding. In addition, Sager had 450,000 shares of preferred stock which were convertible into 750,000 shares of common stock. During 2015, Sager paid $900,000 cash dividends on ..
Which of the following statements about financial statement analysis is(are) most correct? The current ratio measures liquidity.
Photochronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt-equity ratio of .63. It’s considering building a new $65.3 million manufacturing facility. If the tax rate is 38 percent, A new issu..
A town has to resurface a section of its roads. There are two options: gravel or going through another company that uses another surfacing technique. The gravel has an initial cost of $200,000 to put down and it costs $15,000 to grade the road on an ..
Forfaiting. What is forfaiting? Specify the type of traded goods for which forfaiting is applied. Should the World Bank be in charge of providing finance for exports?
Assume that the risk-free rate is 3.5% and the expected return on the market is 8%. What is the required rate of return on a stock with a beta of 1.2?
Jonah’s Fishery has EBITDA of $67 million. Jonah’s market value of equity and debt is $433 million and $40 million, respectively. Jonah has cash on the balance sheet of $16 million. What is Jonah’s EV ratio?
Pujols Lumber Yard has a current accounts receivable balance of $441,516. Credit sales for the year just ended were $7,058,320. What is the receivables turnover? What is the days’ sales in receivables? How long did it take on average for credit cust..
(Cost of debt) The Walgreen Corporation is contemplating a new investment that it plans to finance using one-third debt. The firm can sell new $1,000 par value bonds with a 15-year maturity at a price of $948 that carries a coupon interest rate of 12..
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