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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) %
You purchased a zero coupon bond one year ago for $116.36. The market interest rate is now 12 percent. If the bond had 19 years to maturity when you originally purchased it, what was your total return for the past year?
A corporate bond has a coupon rate of 5.5% and a yield to maturity of 4.905%. You buy the bond when it is quoted at 102.10 percent of par. It has been 75 days since the last coupon payment was made. How much must you pay, per bond?
In May of 201X, six-month futures on the Imaginary Country stock index traded at 15,330. Spot was 13.743. The interest rate was 19 percent and the dividend yield was 4 percent. Were the futures priced fairly? EXPLAIN YOUR ANSWER PLEASE
A US firm has exported merchandise to Germany, invoiced in one million euro and payable in six months. A firm wish is to use "money market hedging" against its transaction exposure. Describe a sequence of transactions for hedging (numerical answer is..
What is the yield to maturity of a 9-year bond that pays a coupon rate of 20% per year, has a $1,000 par value, and is currently priced at $1,426? Assume annual interest payments.
Discuss the topic-Should a multinational firm risk overhedging - creditors may prefer that the multinational firms maintain low exposure to exchange rate risk. Consequently, multinational firms that hedge their exposure to risk may be able to borro..
A delivery company is expanding its fleet by five vans at a total cost of $100,000. Operating and maintenance costs for the new vehicles are projected to be $25,000/year for the next eight years. After eight years, the vans will be sold for a total o..
You open a brokerage account and purchase 200 shares of Google at $443.05 per share. You borrow 40% from your broker to help pay for the purchase. The interest rate on the loan is 8%. What is the initial margin balance?
A bond that settles on June 7, 2013, matures on July 1, 2033, and may be called at any time after July 1, 2023, at a price of 105. The coupon rate on the bond is 6 percent and the price is 115.00. What is the yield to maturity and yield to call on th..
Jeff believes that Microsoft stock will move significantly in either direction with the release of the next version of Windows. Jeff wants to design a strangle strategy to take advantage of the possible move in the stock price. Should Jeff embark on ..
A five-year project has an initial fixed asset investment of $340,000, an initial NWC investment of $36,000, and an annual OCF of −$35,000. The fixed asset is fully depreciated over the life of the project and has no salvage value. If the required re..
Luis has $120,000 in his retirement account at his present company. Because he is assuming a position with another company, Luis is planning to roll over his assets to a new account. Luis also plans to put$2500/quarter into the new account until his ..
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