1. (WACC) Crypton Electronics has a capital structure consisting of 40% common stock and 60% debt. A debt issue of $1000 par value, 50% bonds that mature in 15 years and pay annual interest will sell for $975. Common Stock of the firm is currently selling for $30.83 per share and the firm expects to pay a $2.28 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 the firm’s tax rate is 30% bond rate is 5.9%
Crpton’s cost of capital is _______%. (round to three decimal places.)
2. (WACC) The target capital sturctue for Jowers Manufacturing is 45% common stock, 11% preferred stock, and 44% debt. If the cost of common equity for the firm is 19.5%, the cost of preferred stock is 11.9%, and the beforetax cost of debt is 10.4%, what is Jowers’ cost of capital? The firm’s tax rate is 34%.
Jowers’ WACC is ______%. (Round to three decimal places.)
3. (WACC) As a member of the Finance Department of Ranch Manufacturing, your supervisor has asked you to compute the appropriate disxount rate to use when evaluating the purchase of new packaging 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 follws:
Source of Capital Market Values
Preferred stock $2,100,000
Common Stock $6,200,000
#3. To finance the purchase, Ranch Manufacturing will sell 10-year bonds paying 7.1% per year at the market price of $1,062. Preferred stock paying a $1.98 dividend can be sold for $25.86. Common stock for Ranch Manufacturing is currently selling for $55.33 per share and the firm paid a $2.99 dividend last year. Dividends are expected to continue growing at a rate of 4.5% per year into the indefinite future. If the firm’s tax rate is #0%, what discount rate should you use to evaluate the equipment purchase? Ranch manufacturing’s WACC is _______%. (round to three decimal places.
4. (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 otlets to distribute and service a full line of vacuum cleaners and accessories. Theese stores would be located in Dallas, Houston, and San Antonio. To finace the new venture two plans have been propsed:
-plan A is an all-common-equity strucre in which $2.1 million dollars would be raised by selling 82,000 shares of common stock.
-Plan B would nvolve issuing $1.4 million dollars in long-term bonds wit an effective interest rate of 12.4% plus $0.7 million wold be raised by selling 41,000 shares of common stock. The debt fnds 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 38% 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 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.)
Less: Interest expense ____________
Earnings before taxes ______________
Less: Taxes at 38% _____________
Net Income ____________
Number of Common Shares ____________
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.)
Less: Interest Expense ____________
Earnings Before Taxes ____________
Less: Taxes at 38% ____________
Net Income ____________
Number of common shares ____________