Reference no: EM131078162
In financing its $200M project, Lee Corp. issues $30M par value of preferred stocks, $60M par value of long-term debt, and finances the balance with common stocks that have a stock beta of 1.10. Its 20-year 9% annual coupon paying bonds are priced at 105% of the par value. Its preferred stocks have a 6% annual dividend rate on a par value of $50, and are priced at $54 per share. Assume that the capital market is pricing all financial securities at their respective fair values, and the risk free return and the market risk premium are, respectively, 2% and 10%.
a) Compute the current yield and the capital gain yield of this bond issue.
b) Compute the weighted average cost of capital (WACC), which is based on the market values of financial securities issued, for Lee Corp. assuming that the marginal corporate tax rate is 35%.
c) The flotation costs for raising new debt capital, preferred stock capital and equity capital are, respectively, 3%, 6% and 15%. Besides, this $200M project is expected to generate a NPV of $19M without accounting for the flotation costs. Compute the weighted average flotation cost, and the NPV of this project after taking into account of the flotation costs.
|
Difference between systematic risk and unsystematic risk
: Discuss precisely the key difference between systematic risk and unsystematic risk. Recently, Pfizer terminated its merger proposal with Allergan. State the nature of the risk associated with Pfizer’s decision and explain precisely why risk averse in..
|
|
What is the required rate of return on stock
: Cabell Corp. bonds pay an annual coupon rate of 10%. If investors' required rate of return is now 12% on these bonds, they will be priced at. Crandle's common stock is currently selling for $79.00. It just paid a dividend of $4.60 and dividends are e..
|
|
Define the intrinsic value of security
: State the most appropriate objective of the firm and justify your answer. Precisely define the intrinsic value of a security and compare the intrinsic value analysis to the NPV rule in investment decision making.
|
|
The annual break-even operating cash flow
: Lee Inc. purchases a $300,000 digital color printer, which will be fully depreciated according to the straight-line method over its 5-year economic life, for a 4-year publishing project. The printer will be sold for $75,000 at the termination of the ..
|
|
Compute current yield and capital gain yield of bond issue
: In financing its $200M project, Lee Corp. issues $30M par value of preferred stocks, $60M par value of long-term debt, and finances the balance with common stocks that have a stock beta of 1.10. Compute the current yield and the capital gain yield of..
|
|
The spot exchange rate is what
: Suppose 90-day investments in Europe have an annualized return of 8 percent and a quarterly 90-day return of 2 percent. In the US, 90-day investments of similar risk have an annualized return of 11 percent and a quarterly return of 2.75 percent. If i..
|
|
Compute the price of the bonds based on semiannual analysis
: Heather Smith is considering a bond investment in Locklear Airlines. The $1,000 par value bonds have a quoted annual interest rate of 7 percent and the interest is paid semiannually. The yield to maturity on the bonds is 10 percent annual interest. T..
|
|
After-tax operating income three years from now
: Claremore Candy Company (CCC) just bought a machine that is expected to generate $31001 in operating income before depreciation expenses each year. The machine, which has a depreciable basis of $83990, falls into the MACRS 3-year class. After-tax ope..
|
|
What is the npv of an investment
: What is the NPV of an investment that will cost us $10,000 right now and expects to have cash flows of $1,220 in 1 year, $3,000 in 2 years, and $9,000 in 3 years? Assume a required return of 12%.
|