Reference no: EM13879439
During the last few years, Malware Solution Industries has been too constrained by the high cost of capital to make many capital investments. Recently, though, capital costs have been declining, and the company has decided to look seriously at a major expansion program proposed by the marketing department. John Carter who is an assistant to Mary Ward, the financial vice president is asked to estimate Malware Solution’s cost of capital. Ward provides Carter with the following data.
1. The firm’s tax rate is 40%.
2. The firm has 10% annual coupon bonds with 15 years remaining to maturity. The current price of the bond is $1, 096.26. The bond’s yield-to-maturity is 8.82%.
3. The firm’s balance sheet shows $100 million long-term debt and $300 million common equity.
Ward estimates the market risk premium as the historical average return on stocks minus the current return on Treasury bonds and obtains a 15.4% of the cost of common stock based on the CAPM.
Ward calculates the firm’s weighted average cost of capital (WACC) as follows:
Weight of long-term debt is .25 (=100/400)
Weight of common equity is .75 (=300/400)
WACC = .25 x 10% x (1 - .4) + .75 x 15.4% = 13.05%
Questions :
1. Find problems inherent in Ward’s WACC calculation.
2. What can you suggest to solve problems found in Question 1?
3. Ward used the CAPM to estimate the cost of common stock. What can you propose to get the best estimate for the cost of common stock?
4. How confident can you be with the WACC based on solutions you suggested through the evaluative process in terms of the firm’s divisions and projects? What issues should be considered?
|
Current exchange rate between the dollar and the yen
: The Japanese supplier has agreed to give Jenkins payment terms of net 90. The Japanese firm insists that payments be made in yen. The current exchange rate between the dollar and the yen is 108 yen per dollar. The 3-month forward exchange rate is 105..
|
|
Observe that a company has entered into futures contracts
: You observe that a company has entered into futures contracts where the company is obligated to sell more of the commodity it produces than the volume they actually expect to produce. How might this be justified? What if instead you observed that a c..
|
|
Minimizes the sum of the numeric pref- erences of all driver
: Formulate this as an assignment problem that minimizes the sum of the numeric pref- erences of all drivers.
|
|
Find an entity capable of serving as an IRO
: You work for a healthcare organization that has just entered into a CIA. You have been asked to identify and contract with an appropriate IRO to perform the reviews required by the CIA. In 200 words or more, explain where you will look to find an ent..
|
|
Propose to get best estimate for the cost of common stock
: During the last few years, Malware Solution Industries has been too constrained by the high cost of capital to make many capital investments. Find problems inherent in Ward’s WACC calculation. What can you suggest to solve problems found in Question ..
|
|
What is the minimum expected annual return for stock
: In order to fund her retirement, Michele requires a portfolio with an expected return of 0.10 per year over the next 30 years. She has decided to invest in Stocks 1, 2, and 3, with 25 percent in Stock 1, 50 percent in Stock 2, and 25 percent in Stock..
|
|
Determine the one-to-one assignment of the nine workers
: Solve this assignment problem using Solver to determine the one-to-one assignment of the nine workers to the nine jobs in a way that minimizes the total time to complete all tasks.
|
|
Municipal bond is currently priced to yield
: A 5.5% 20 year municipal bond is currently priced to yield 7.2%. For a taxpayer in the 33% marginal tax bracket , this bond would offer an equivalent taxable yield of what?
|
|
What is the crossover rate
: Project A has cash flows of -$50,000, $29,400, $27,200, and $24,500 for years 0 to 3, respectively. Project B has an initial cost of $50,000 and an annual cash inflow of $26,500 for three years. These are mutually exclusive projects. What is the cros..
|