Reference no: EM13833968

1. Flotation costs and NPV analysis: The Faraway Moving Company is involved in a major plant expansion that involves the expenditure of $181 million in the coming year. The firm plans on financing the expansion through the retention of $144 million in firm earnings and by borrowing the remaining S37 million. In return for helping sell the S37 million in new debts, the firm's investment banker charges a fee of 300 basis points (where one basis point is 0.01 percent). If Faraway decides to adjust for these flotation costs by adding them to the initial outlay, what will the initial outlay for the project be?

2. Weighted average cost of capital: As a member of the Finance Department of Ranch Manufacturing, your supervisor has asked you to compute the appropriate discount rate to use when evaluating the purchase of new packaging equipment for the plant. Under the assumption that the firm's present capital structure reflects the appropriate mix of capital sources for the firm, you have determined the market value of the firm's capital structure as follows:

To finance the purchase, Ranch Manufacturing will sell 10-year bonds paying interest at a rate of 7.5 percent per year (with semiannual payment) at the market price of $1,075. Preferred stock paying a $2.03 dividend can be sold for S24.99. Common stock for Ranch Manufacturing is currently selling for $54.75 per share and the firm paid a $3.01 dividend last year. Dividends are expected to continue growing at a rate of 5.2 percent per year into the indefinite future. If the firm's tax rate is 30 percent, what discount rate should you use to evaluate the equipment purchase?

Source of Capital	Market Value
Bonds	$3,900,000
Preferred stock	$1,900,000
Common stock	$5,900,000

3. Weighted average cost of capital: Crypton Electronics has a capital structure consisting of 37 percent common stock and 63 percent debt. A debt issue of S1, 000 par values, 5.6 percent bonds that mature in 15 years and pay annual interest will sell for S979. Common stock of the firm is currently selling for S29.28 per share and the firm expects to pay a $2.17 dividend next year. Dividends have grown at the rate of 4.8 percent per year and are expected to continue to do so for the foreseeable future. What is Crypton's cost of capital where the firm's tax rate is 30 percent?

4. Weighted average cost of capital: The target capital structure for QM Industries is 42 percent common stock, 15 percent preferred stock, and 43 percent debt. If the cost of common equity for the firm is 17.5 percent, the cost of preferred stock is 10.6 percent, the before-tax cost of debt is 8.3 percent, and the firm's tax rate is 35 percent, what is QM's weighted average cost of capital?

5. Cost of debt: Sincere Stationery Corporation needs to raise $518,000 to improve its manufacturing plant. It has decided to issue a $1,000 par value bond with an annual coupon rate of 10.1 percent with interest paid semiannually and a 10-year maturity. Investors require a rate of return of 8.1 percent.

a. Compute the market value of the bonds.

b. How many bonds will the firm have to issue to receive the needed funds?

c. What is the firm's after-tax cost of debt if the firm's tax rate is 34 percent?

6. Cost of debt: Gillian Stationery Corporation needs to raise $637,000 to improve its manufacturing plant. It has decided to issue a $1,000 par value bond with an annual coupon rate of 7.3 percent with interest paid semiannually and a 15-year maturity. Investors require a rate of return of 10.7 percent.

a. Compute the market value of the bonds.

b. Mow many bonds will the firm have to issue to receive the needed funds?

c. What is the firm's after-tax cost of debt if the firm's tax rate is 34 percent?

7. Cost of common equity: The common stock for the Hetterbrand Corporation sells for S60.35, and the last dividend paid was $2.26. Five years ago the firm paid S1.85 per share, and dividends are expected to grow at the same annual rate in the future as they did over the past five years.

a. What is the estimated cost of common equity to the firm using the dividend growth model?

b. Hetterbrand's CFO has asked his financial analyst to estimate the firm's cost of common equity using the CAPM as a way of validating the earlier calculations. The risk-free rate of interest is currently 4.3 percent, the market risk premium is estimated to be 4.7 percent, and Hetterbrand's beta is 0.83. What is your estimate of the firm's cost of common equity using this method?

8. Cost of common equity: The common stock for the Bestsold Corporation sells for S58.97 a share. Last year the firm paid a $4.03 dividend, which is expected to continue to grow 3.4 percent per year into the indefinite future. If Bestsold's tax rate is 34 percent, what is the firm's cost of common equity?

9. Individual or component costs of capital: Your firm is considering a new investment proposal and would like to calculate its weighted avenge cost of capital. To help in this, compute the cost of capital for the firm for the following:

a. A bond that has a $1,000 par value (face value) and a contract or coupon interest rate of 12.8 percent that is paid semiannually. The bond is currently selling for a price of $1,127 and will mature in 10 years. The firm's tax rate is 34 percent.

b. If the firm's bonds are not frequently traded, how would you go about determining a cost of debt for this company?

c. A new common stock issue that paid a $1.79 dividend last year. The par value of the stock is $15, and the firm's dividends per share have grown at a rate of 8.7 percent per year. This growth rate is expected to continue into the foreseeable future. The price of this stock is now $27.67.

d. A preferred stock paying a 10.5 percent dividend on a $128 par value. The preferred shares are currently selling for $151.41.

e. A bond selling to yield 13.6 percent for the purchaser of the bond. The borrowing firm faces a tax rate of 34 percent.

10. Defining capital structure weights: Templeton Extended Care Facilities, Inc. is considering the acquisition of a chain of cemeteries for $420 million. Since the primary asset of this business is real estate, Templeton's management has determined that they will be able to borrow the majority of the money needed to buy the business. The current owners have no debt financing but Templeton plans to borrow $320 million and invest only $100 million in equity in the acquisition. What weights should Templeton use in computing the WACC for this acquisition?