the target capital structure for qm industries 501238

Aug 29, 2021 | Uncategorized

  1. (Weighted average cost of capital) The target capital structure for QM Industries is 35% common stock, 5% preferred stock, and 60% debt. If the cost of common equity for the firm is 17.6%, the cost of preferred stock is 10.3%, the before-tax cost of debt is 7.1%, and the firm’s tax rate is 35%, what is QM’s weighted average cost of capital?
    QM’s WACC is ___%. (Round to three decimal places.)
  2. (Weighted average cost of capital) Crypton Electronics has a capital structure consisting of 43% common stock and 57% debt. A debt issue of $1000 par value, 5.9% bonds that mature in 15 years and pay annual interest will sell for $975. Common stock of the firm is currently selling for $29.29 per share and the firm expects to pay a $2.25 dividend next year. Dividends have grown at the rate of 4.9% 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%?
    Crypton’s cost of capital is ___% (Round to three decimal places.)
  3. (Weighted average cost of capital) The target capital structure for lowers Manufacturing is 55% common stock, 19% preferred stock, and 26% debt. If the cost of common equity for the firm is 19.1%, the cost of preferred stock is 11.2%, and the beforetax cost of debt is 10.1%, what is Jowers’ cost of capital? The firm’s tax rate is 34%.
    Jowers’ WACC is ___%. (Round to three decimal places.)
  4. 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. You have determined the market value of the firm’s capital structure as follows:
    Source of Capital/Market Values
    Bonds/$4,300,000
    Preferred Stock/$2,200,000
    Common Stock $5,700,000
    To finance the purchase, Ranch Manufacturing will sell 10-year bonds paying 6.6% per year at the market price of $1028. Preferred Stock paying $1.91 dividend can be sold $24.46. Common Stock for Ranch Manufacturing is currently selling for $54.38 per share. The firm paid a $3.03 dividend last year and expects dividends to continue growing at a rate of 5.4% 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?
    Ranch Manufacturing’s WACC is ___%. (Round to three decimal places.)
  5. (EBIT-EPS analysis) Abe Forrester and three of his friends from college have interested a group of venture capitalists in backing their business idea. The proposed operation would consist of a series of retail outlets to distribute and service a full line of vacuum cleaners and accessories. These stores would be located in Dallas, Houston, and San Antonio. To finance the new venture two plans have been proposed:
    Plan A is an all-common-equity structure in which $2.1 million dollars would be raised be selling 88,000 shares of common stock.
    Plan B would involve issuing $1.3 million dollars in long-term bonds with an effective interest rate of 11.8% plus $0.8 million would be raised by selling 44,000 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 firm s capital structure.
    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.
    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.

    a. Find the EBIT indifference level associated with the two financing plans.
    The EBIT indifference level associated with the two financing plans is $____. (Round to the nearest dollar.)
    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.
    Complete the segment of the income statement for Plan A below (Round income statement amounts to the nearest dollar except the EPS to the nearest cent.)
    Stock Plan
    EBIT $________
    Less: Interest Expense _________
    Earnings Before Taxes ________
    Less: Taxes at 35% _________
    Net Income ________
    Number of Common Shares ________
    EPS ________

    Complete the segment of the income statement for Plan B below: (Round income statement amounts to the nearest dollar except the EPS to the nearest cent.)
    Bond/Stock Plan _________
    EBIT _________
    Less: Interest Expense ______
    Earnngs Before Taxes _______
    Less: Taxes at 35% ________
    Net Income ________
    Number of Common Shares ________
    EPS __________