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Weighted average cost of capital) As a consultant to GBH Skiwear, 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: Weighted average cost of capital To finance the purchase, GBH will sell 20-year bonds with a $1,000 par value paying 8.4 percent per year (paid semiannually) at the market price of $929. Preferred stock paying a $2.51 dividend can be sold for $34.03. Common stock for GBH is currently selling for $49.09 per share. The firm paid a $4.06 dividend last year and expects dividends to continue growing at a rate of 3.5 percent per year into the indefinite figure. The firm's marginal tax rate is 34 percent.
Calculate component weights of capital: What is the weight of debt in the firm’s capital structure? What is the weight of preferred stock in the firm’s capital structure? What is the weight of common stock in the firm’s capital structure? Calculate component costs of capital: What is the after-tax cost of debt for the firm? What is the cost of preferred stock for the firm? What is the cost of common equity for the firm? Calculate the firm's weighted average cost of capital. What is the discount rate you should use to evaluate the warehouse project? (Round to three decimal places.)
An asset has had an arithmetic return of 10.9 percent and a geometric return of 8.9 percent over the last 88 years. What return would you estimate for this asset over the next 8 years? 22 years? 29 years?
Last year Jamel and Cheryl borrowed $40,000 on a home equity line of credit against their home on May 1st. The interest rate on the loan is 5.75 %. John and Cheryl are in the 28 percent tax bracket. What will be their tax savings for the first year e..
You have a 2-stock portfolio with a total value of $510,000. $195,000 is invested in Stock A and the remainder is invested in Stock B. If standard deviation of Stock A is 19.90%, Stock B is 9.35%, and correlation between Stock A and Stock B is –0.60,..
Consider the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) 0 –$ 346,000 –$ 48,000 1 49,000 24,400 2 69,000 22,400 3 69,000 19,900 4 444,000 15,000 Which ever project you choose, if any, you require a 16 percent return on..
Mr. Miser loans money at an annual rate of 19 percent. Interest is compounded daily. What is the actual rate Mr. Miser is charging on his loans? 20.98 percent 20.92 percent 21.18 percent 20.68 percent 20.54 percent
Assume that the returns from an asset are normally distributed. The average annual return for this asset over a specific period was 17.5 percent and the standard deviation of those stocks in this period was 43.89 percent. What is the approximate prob..
The covariance between rate of return on risk-free asset and rate of return on any risky asset is zero. Multi-factor models enable us to form causal relationships between security returns and movement of one or more common factors.
Coverage ratios as covenants are calculated using values from the _________. Current ratios as covenants are calculated using values from the ______. Income statement; income statement and balance sheet _____________ as a source of short-term financi..
Empirical research suggests that the yield curve is a good predictor of future interest rates
Wayco Industrial Supply has a pretax cost of debt of 7.6 percent, a cost of equity of 16.8 percent, and a cost of preferred stock of 9.1 percent. The firm has 220,000 shares of common stock outstanding at a market price of $27 a share. There are 25,0..
What is the lump sum equivalent today of $300 received at the end of each of the nxt 30 years at 4% compounded annually?
Martha, a 75-year-old widow, owns more than $8 million in assets. Martha’s son, Jonathan, has two children, ages 10 and 13. Her daughter, Annie, also has two children, ages 9 and 13. What planning opportunities can you suggest so that Martha can prov..
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