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Crypton
Electronics has a capital structure consisting of 36% common stock and 64%
debt. A debt issue of $1,000 par value, 6.4% bonds that mature in 15 years and
pay annual interest will sell for $975. Common stock of the firm is currently
selling for $30.23 per share and the firm expects to pay a $2.21 dividend next
year. Dividends have grown at the rate of 4.7% 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%.
Cryptons
Cost of Capital is ______ %
2.
(weighted average cost of capital) The target capital structure for Jower’s
manufacturing is 46% common stock, 13% preferred stock , and 41% debt. If the
cost of common equity for the firm is 19.7%, the cost of preferred stock is
12.5%, and the before tax cost of debt is 9.8%, what is Jower’s cost of
capital? The firm’s tax rate is 34%. (Round to the nearest three decimal places)
Jowers
WACC is ____%
3. As
a member of the Finance Department of Ranch Manufacturing, your supervisor has
asked you to compute the appropriate discount rate of use when evaluating the
purchase of new packing 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:
Source
of Capital Market Values
Bonds
$3,500,000
Preferred
Stock $2,400,000
Common
Stock $6,300,000
3. To
finance the purchase, Ranch Manufacturing will sell 10-year bonds paying 7.1%
per year at the market price of $1071. Preferred Stock paying $1.94 dividend
can be sold $25.58; Common Stock for Ranch Manufacturing is currently selling
for $54.89 per share. The firm paid a $3.08 dividend last year and expects
dividends to continue growing at a rate of 4.8% per year. The firm’s tax rate
is 30 percent. What discount rate should you use to evaluate the equipment
purchase?
Ranch
Manufacturing’s WACC is __% (round to three decimal places)
4. Abe
Forrester and three of his friends from college have interested a group of
venure capitalists in backing their busines idea. The proposed operation would
consist of a series of retail outlets to distribute and service a full line ot
vacuum cleaners and accessories. These stores would be located in Dallas,
Houston, and San Antonio. To finance the new venture two plans have been
propsed:
– Plan
A is an all-common-equity structure which $2.2million dollars would be raised
by selling 86,000 shares of common stock.
2.
-Plan B
would involve issuing $1.2 million dollars in long-term bonds with efective
interest rate of 11.8% plus 1.0 milion would be raised by selling 43,000 shares
of common stock. The debt funds raised under Plan B have no fixed maturity
date, in that this amount of financial leverage is considered a permanent part
of the firms capital sructure.
Abe
and his partners plan to use a 35% tax rate in their analysis and they have
hired you on a consulting basis to do the following:
A:
Find the EBIT indifference level associated with the two financing plans.
The EBIT
indifference level is associated with the two financing plans is $ ______
B:
Prepare a pro forma income statement for the EBIT level SOLVED for in Part A.
that shows that EPS will be the same regardless whether Plan A or B is chosen.
5. –
three recent graduates of the computer science program at the university of
Tennessee are forming a company that will write and distribute new application
software for the iPhone. Initially the corporation will operate in the southern
region of Tennessee, Georgia, north Carolina, and South Carolina. A small group
of private investors in the Atlanta, Georgia area is interested in financing
the startup company and two financing plans have been put forth for
consideration:
The
first plan (plan A) is an all-common-equity capital structure. 2.3 million
dollars would be raised by selling common stock at $10 per common share
– Plan
B would involve the use of financial leverage. 1.1 million dollars would be
raised by selling bonds with an effective interest rate of 10.8% (per annum)
and the remaining 1.2 million would be raised by selling common stock at the
$10 price per share. The use of financial leverage is considered to be a
permanent part of the firms capitalization, so no fixed maturity date is needed
for the analysis. A 34% tax rate is deemed appropriate for the analysis.
A.
Find the EBIT indifference level associated with the two financial plans. $
________
– B. A
detailed financial analysis of the firms prospects suggests that the long term
EBIT will be above $318,000 annually. Taking this into consideration, which
plan will generate the higher EPS?
