Reference no: EM132740792
Molly Company wishes to compute a weighted average cost of capital for use in evaluating capital expenditure proposals. Earnings, capital structure, and current market prices of the company's:
Earnings:
Earnings before interest and tax 400,000
Interest expense on bonds 100,000
Pretax Earnings 300,000
Income Tax (40%) 120,000
After tax-earnings 180,000
Preferred Stock Dividends 75,000
Earnings Available to Common Stockholders 105,000
Common Stock Dividends 50,000
Retained Earnings 55,000
Capital Structure:
Mortgage bonds, 12%, 20 years 500,000
Preferred stock, 15%, 100 par 500,000
Common Stock, no par, 25,000 shares 300,000
Retained Earnings (Equity of Common Stockholders) 700,000
Total 2,000,000
Market Price of the company's securities:
Preferred Stock 100
Common Stock 30
From the given above:
Problem 1: What is the Cost of Debt?
a. cannot be computed c. 7%
b. 5% d. 12%
Problem 2: What is the cost of Preferred Stock?
a. cannot be computed c. 5%
b. 15% d. 9%
Problem 3: What is the cost of Retained Earnings?
Problem 4: What is the cost of Common Stock??
a. cannot be computed c. 4.20%
b. 15% d. 14%
Problem 5: What is the Weighted-Average Cost of Capital?
a. 36% c. cannot be computed
b. 12. 55% d. 14.75%
Problem 6: Assume a company uses only a debt and retained earnings to finance its capital budget and uses CAPM to compute its costs of equity. Company estimates that Weighted-Average Cost of Capital is 12% and the capital structure is 75% debt and 25% retained earnings. Before Tax cost of debt is 12.5% and tax rate is 20%. Risk-free rate is 6% and market risk premiums is 8%. What is the beta of the company?
a. 2.1 c.none of these
b. 1.5 d. 1.3
Problem 7: What is the value of stock that pays 1.5 in dividends if the required rate of return is 10% and the dividend is expected to grow at 5%?
a. 10 c. 75
b. 30 d. 100
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