Question 1

The most recent data for Harper Housewares is given below:
 Balance Sheet Data
$\begin{array} { l r r r } \text { Cash } & 250,000 & \text { Accounts Payable } & 480,000 \ \text { Marketable Securities } & 150,000 & \text { Notes Payable } & 425,000 \ \text { Receivables } & 350,000 & \text { Long Term Debt } & 1,465,000 \ \text { Inventory } & 800,000 & \text { Preferred Equity } & 430,000 \ \text { Net Fixed Assets } & \underline { 3,450,000 } & \text { Common Equity } & 1,400,000 \ \text { Total Assets } & 5,000,000 & \text { Retained Earnings } & \underline { 800,000 } \ & & \text { Total Liabilities and Equity } & 5,000,000 \end{array}$
Market Data
 $\quad\quad\quad\quad\quad\quad\quad price \quad shares  outstandings$
Preferred Equity $\quad \$ 60.00 \quad 50,000$
Common Equity $\quad \$ 35.00 \quad 100,000$ What are Harper's weights for debt, common equity and preferred equity?

Accepted Answer

V_d = 425,000 + 1,465,000 = 1,890,000; V_p = 60 × 50,000 = 3,000,000; V_e = 35(100,000) = 3,500,000; TV = 1,890,000 + 3,000,000 + 3,500,000 = 8,390,000 W_d = 1,890,000/8.390,000 = 22.53%; W_p = 3,000,000/8,390,000 = 35.76%; W_e = 3,500,000 / 8,390,000 = 41.71%

Question 2

Tandem Industries can sell new shares of preferred stock for $28.00 per share, but flotation costs will run them $1.00 per share. Tandem's preferred stock currently pays a $3.00 dividend. What is the component cost for Tandem's new preferred equity?

Accepted Answer

k_p = 3 / 27 = 11.11%

Question 3

The CEO of Harlem Hardware Supplies has submitted together a capital budget of $48,500,000 for the following year's investment opportunities. He expects to have $19,000,000 in retained earnings at the end of the year. Harlem's target capital structure calls for 45 percent equity. Based on these figures, will Harlem be able to meet their capital budget needs with retained earnings?

Accepted Answer

REBP = 19,000,000 / .45 = 42,222,222; since REBP < $48.5 million (the following year's capital budget), the firm will need to issue new equity for some of their investment projects

Question 4

Daytona Dairies has preferred stock that pays a dividend of $3.25. Their preferred stock currently sells for $34.21. Flotation costs for new preferred stock are expected to be 5% of the share price. What is the component cost of Daytona's preferred equity?

Accepted Answer

The answer of Daytona Dairies has preferred stock that pays...

Question 5

Calculate the after-tax cost of debt for firms with the following yields to maturity for their new bonds. Assume the firm's marginal tax rate is 25.00%.
a. YTM = 6.40%
b. YTM = 7.80%
c. YTM = 9.90%
Repeat parts a-c using a marginal tax rate of 35.00%. What effect does raising the tax rate have on the component cost of debt?

Accepted Answer

The answer of Calculate the after-tax cost of debt for...

Question 6

T-notes are currently paying 5.5%, while the S&P 500 is paying 8%. Sentry Electronics has a beta of 1.5. What is the component cost of Sentry's retained earnings?

Accepted Answer

The answer of T-notes are currently paying 5.5%, while the...

Question 7

Fairweather Pharmacies' component costs of capital and their weights are given below: k_d = 10% w_d = 45% k_p = 5% w_p = 10% k_e = 8% w_e = 45% T = 40% Given these figures, what is Fairweather's weighted-average cost of capital?

Accepted Answer

The answer of Fairweather Pharmacies' component costs of capital and...

Question 8

Newman International has an optimal capital structure that consists of 35.00% debt, 15.00% preferred equity, and 50.00% common equity. Their new bond issue will have a coupon rate of 7.20%. Their preferred stock currently sells for $40 per share, and floating new shares would cost $2.00 per share. The preferred dividend is fixed at $2.60 annually. Newman's common stock has a current market price of $33.00, and floating new common shares would cost Newman 6.00% of the share price. The most recent annual common dividend paid was $2.50, and the dividend is expected to grow at an annual rate of 5.00%. The firm's marginal tax rate is 30.00%. Use these data to calculate Newman's WACC using both retained earnings and new common equity.

Accepted Answer

The answer of Newman International has an optimal capital structure...

Question 9

Explain in your own words the logic of using the weighted average cost of capital as the discount rate for capital projects.

Accepted Answer

The answer of Explain in your own words the logic...

Question 10

List the component costs of capital in ascending order (all four of them). Justify your ranking with an explanation for each component cost.

Accepted Answer

The answer of List the component costs of capital in...

Question 11

Gallagher Industries' common stock currently sells for $20.00 per share. The common dividend just paid was $1.20, and the dividend is expected to increase at a rate of 5% annually. Floating new common shares will cost Gallagher 5% of the market price of the stock. What is Gallagher's component cost of new common equity?

Accepted Answer

The answer of Gallagher Industries' common stock currently sells for...

Question 12

Your boss is the treasurer of the company, and she expects the firm will grow at 4.00% annually in the future. She also believes that issuing bonds is less expensive than the cost of retained earnings. Your firm's debt securities have a yield to maturity of 8.50%, and the firm's marginal tax rate is 30.00%. The current market price of your firm's common stock is $19.00, and the annual dividend expected next year is $1.50 per share.
Calculate the component costs of both debt and retained earnings to see if your boss is right.

Accepted Answer

The answer of Your boss is the treasurer of the...

Question 13

Anspagh Automobiles just paid a common dividend of $2.50 at the end of last year, and that dividend is expected to grow at an annual rate of 10%. Their common stock currently sells for $101.85, which is what they expect to get for newly issued shares at this time. Flotation costs on newly issued shares are 5% of the stock price. What is Anspagh's component cost of new equity?

Accepted Answer

The answer of Anspagh Automobiles just paid a common dividend...

Question 14

Empire Capital Enterprises has a beta of 1.36. The current yield on 10-year US T-notes is 4.25%, and the return to the S&P 500 index fund is 9.60%. Given these data, what is Empire's cost of retained earnings?

Accepted Answer

The answer of Empire Capital Enterprises has a beta of...

Exam 8: Capital Structure and the WACC