What is the market interest rate on harry davis debt

Assignment Help Accounting Basics
Reference no: EM131524715

Question: During the last few years, Harry Davis 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 that had been proposed by the marketing department. Assume that you are an assistant to Leigh Jones, the financial vice president. Your first task is to estimate Harry Davis's cost of capital. Jones has provided you with the following data, which she believes may be relevant to your task:

(1) The firm's tax rate is 40 percent.

(2) The current price of Harry Davis's 12 percent coupon, semiannual payment, noncallable bonds with 15 years remaining to maturity is $1,153.72. Harry Davis does not use short-term interestbearing debt on a permanent basis. New bonds would be privately placed with no flotation cost.

(3) The current price of the firm's 10 percent, $100 par value, quarterly dividend, perpetual preferred stock is $113.10. Harry Davis would incur flotation costs of $2.00 per share on a new issue.

(4) Harry Davis's common stock is currently selling at $50 per share. Its last dividend (D0) was $4.19, and dividends are expected to grow at a constant rate of 5 percent in the foreseeable future. Harry Davis's beta is 1.2, the yield on T-bonds is 7 percent, and the market risk premium is estimated to be 6 percent. For the bondyield-plus-risk-premium approach, the firm uses a 4 percentage point risk premium.

(5) Harry Davis's target capital structure is 30 percent long-term debt, 10 percent preferred stock, and 60 percent common equity.

To structure the task somewhat, Jones has asked you to answer the following questions.

a. (1) What sources of capital should be included when you estimate Harry Davis's weighted average cost of capital (WACC)?

(2) Should the component costs be figured on a before-tax or an after-tax basis?

(3) Should the costs be historical (embedded) costs or new (marginal) costs?

b. What is the market interest rate on Harry Davis's debt and its component cost of debt?

c. (1) What is the firm's cost of preferred stock?

(2) Harry Davis's preferred stock is riskier to investors than its debt, yet the preferred's yield to investors is lower than the yield to maturity on the debt. Does this suggest that you have made a mistake? (Hint: Think about taxes.)

Reference no: EM131524715


Write a Review


Accounting Basics Questions & Answers

  Journal entries for rescue sequences to record

Rescue Sequences, LLC, purchased inventory by issuing a $12,000, 10%, 60 day note on October 1.

  Problem regarding actual sales and fixed costs

Quiltworks company reported actual sales of $2,000,000, and fixed costs of $450,000. The contribution margin ratio is 30%.

  A bond that has a 1000 par value and a contract or coupon

a bond that has a 1000 par value and a contract or coupon interest rate of 10.5. the bonds have a current market value

  Performance appraisal assignment

Write a paper describing how effective performance appraisals can increase employee performance. This paper should include sections on the strategic advantages of performance appraisals, potential forms of bias within the appraisal system, as well..

  Which of the following costs can be traced directly to boxes

The accountant in a factory that produces biscuits for fast-food restaurants wants to assign costs to boxes of biscuits. Which of the following costs can be traced directly to boxes of biscuits?

  Assuming the shares are held in the treasury

Kwun, Inc. purchases 1,000 shares of its own previously issued $5 par common stock for $12,000. Assuming the shares are held in the treasury, what effect does this transaction have on

  Determination of appropriate inventory flow method

Objectives: Demonstrate application of Concepts pertaining to a Merchandising Company including the following: Determination of appropriate inventory flow method for Perpetual System

  Sunshine cos bookkeeper recorded a check as 693 on the

the following items are from the bank reconciliation of sunshine co. for the month ended february 292000. where does

  Comprehensive the following information for 2010 is

comprehensive the following information for 2010 is available for the marino company1. the beginning inventory is

  What should ellen electric do in this situation explain

department a department b department c total sales 300000 280000 120000 700000 variable expenses 160000 175000 105000

  The amount of fica taxes that was withheld from his earnings

George Parker was paid a salary of $74,700 during 2013 by Umberger Company. In addition, during the year, Parker started his own business as a public accountant and reported a net business income of $38,900 on his income tax return for 2013. Compute ..

  On january 1 2013 calloway company leased a machine to zone

on january 1 2013 calloway company leased a machine to zone corporation. the lease qualifies as a direct financing

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd