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Christopher William, president of William Industries which produces widgets, has hired you to determine its cost of debt and the cost of equity capital. The stock currently sells for $25 per share and the dividend will be $5. Christopher argues that it will cost us $5 per share to use the stockholders money this year therefore the cost of equity is equal to 20%. Furthermore, Christopher believes that the cost of debt is 25%. This is based upon the most recent financial statements which show that William Industries has total liabilities of $10 million and will face total interest expenses for the year of $2.5 million. Christopher argues that the company should increase its use of equity financing because debt costs 25% while equity only costs 20% and thus equity is cheaper. Is Christopher’s analysis of the cost of equity, debt, and decision to increase the use of equity financing over debt financing accurate? Defend your answers in a 500 to 750 word report and cite your sources.
You have a client that wants you to build them a bond portfolio that has no default risk and a target date of 13 years. (Their 5-year old child will attend college in 13 years. You are responsible for their college savings.) The client wants to inves..
Momsen Corp. is experiencing rapid growth. Dividends are expected to grow at 25 percent per year during the next three years, 15 percent over the following year, and then 7 percent per year indefinitely. The required return on this stock is 12 percen..
Is it easier for the IRS to determine that an individual omitted an income item from a return or overstated deductions?
The growth rate for the firm's common stock is 7%. The firm's preferred stock is paying an annual dividend of $5. What is the preferred stock price if the required rate of return is 8%?
Assume you receive an 8 year annuity with annual payments to you of $600 at the end of each year, with the first payment being received at the end of year 1 and the last payment being received at the end of year 8. You invest each payment in an accou..
Determine the amount of interest the bank would make on each loan and indicate the amount of net proceeds that the bank would pay out on each loan. On which loan would the customer receive the most proceeds? Calculate the percent interest rate (APR) ..
A firm has 0 debts in its capital structure. Its overall cost of capital is 9%. The firm is considering a new capital structure with 40% debt. The interest rate on the debt would be 4%. Assuming that the corporate tax rate is 34%, what would be its c..
A contractor has purchased a piece of equipment for $150,000 and expects to use it 1,000 hrs per year for 10 years. The salvage value is $8,000 after 10 years. A single major repair of $20,000 is expected at the end of the 5th year. With an interest ..
Cane Company manufactures two products called Alpha and Beta that sell for $190 and $155, respectively. Each product uses only one type of raw material that costs $8 per pound. How many pounds of raw material are needed to make one unit of Alpha and ..
A firm's cost of capital will generally increase if the firm lowers its debt-equity ratio. The cost of equity will generally increase for risky firms when the risk-free rate of return increases. An increase in which one of the following is most apt t..
Define the management’s discussion and analysis. Describe in a memo, not to exceed 300 words, the major items disclosed in this section of the financial report.
Analysts predict that a company's earning will grow at 30% per year for the next five years. After, earnings growth is expected to slow down to 6% a year and continue at that rate forever. The company's earnings are $2 million. What is the present va..
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