1. (Weighted average cost of capital) The target capital structure for QM Industries is 45% common stock, 7%preferredstock, and 48% debt. If the cost of commonequityfor the firm is 17.8%, the cost of preferred stock is 9.8%, the before-tax cost of debt is 8.4%, 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 35% common stock and 65% debt. A debt issue of $1,000 par value, 6.5% bonds that mature in 15 years and pay annual interest will sell for $972. Common stock of the firm is currently selling for $30.96 per share and the firm expects to pay a $2.16dividendnext year. Dividends have grown at the rate of 5.1% 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 Jowers Manufacturing is 46% common stock, 13% preferred stock, and 41% debt. If the cost of common equity for the firm is 20.4%, the cost of preferred stock is 11.4%, and the beforetax cost of debt is 9.9%, what is Jowers cost of capital? The firm s tax rate is 34%.
Jowers WACC is ____________%. (Round to three decimal places.)
4. (Weighted average cost of capital) As a member of the Finance Department of Ranch Manufacturing, your supervisor has asked you to compute the appropriate discount 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 follows:
To fianc the purchase, Ranch Manufacutring will sell 10-year bonds paying 7.1% per year at the market price of $1,027. Preferred stock paying a $2.09 dividend can be sold for $25.66. Common stock for Ranch Manufacturing is currently selling for 455.21 per share and the firm paid a $3.04 dividend last year. Dividends are expected to continue growing at a rate of 4.8% per year into the indefinite future. If the firm s tax rate is 30%, what discount rate should you use to evaluate the equipment purchase?
Ranch Manufacturing s WACC is __________%. (Round to three decimal places.)
DATA TABLE
Source of capital Market values
Bonds $3,700,000
Preferred stock $1,800,000
Common Stock $5,900,000
5. (EBIT-EPS analysis) Abe Forrester and three of his friends from college have interested a group of ventre capitalists in backing their business idea. The proposed operation would consist of a ceries of retail otlets to distribute and service a full line of vacuum cleaners and accessories. These stores would be locted in Dallas, Houston, and San Antonio. To fiace the new ventre two plans have been proposed:
-Plan A is an all-common-equity structure in which $2.1 million dollars would be raised by selling 82,000 shares of common stock.
-Plan B would involve issuing $1.4 million dollars in long-term bonds with an effective interest rate of 11.8% plus $0.7 million would be raised by selling 41,000 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 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 regarless 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 income statement for the EBIT level solved for in Part a. that shows that EPS will be the same regarless 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 38% $____________
Net Income $_____________
Number of common shares $_____________
EPS $_____________
Complete the segment of the income statement for Plan B below: (round income statement amount to the nearest dollar except the EPS to the nearest cent.)
Bond/Stock Pan
EBIT $____________
Less: Interest expense $____________
Earnings Before Taxes $_____________
Less: Taxes at 38% $_____________
Net Income $_______________
Number of common shares $_____________
EPS $________________
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