Project #17036 - Finance

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1 Cost of Common Equity and WACC

Patton Paints Corporation has a target capital structure of 40% debt and 60% common equity, with no preferred stock. Its before-tax cost of debt is 12% and its marginal tax rate is 40%. The current stock price is P0 = $22.00. The last dividend was D0 = $3.50, and it is expected to grow at a 6% constant rate. What is its cost of common equity and its WACC? Round your answers to two decimal places.

a.  rs = ________ %

b.  WACC = ________ %

2. WACC and Percentage of Debt Financing

Hook Industries' capital structure consists solely of debt and common equity. It can issue debt at rd = 8%, and its common stock currently pays a $2.50 dividend per share (D0 = $2.50). The stock's price is currently $27.25, its dividend is expected to grow at a constant rate of 6% per year, its tax rate is 35%, and its WACC is 12.55%. What percentage of the company's capital structure consists of debt? Round your answer to two decimal places.

________ %

3. WACC and optimal capital budget

Adams Corporation is considering four average-risk projects with the following costs and rates of return:

Project

Cost

Expected Rate of Return

1

$2,000

16.00%

2

3,000

15.00

3

5,000

13.75

4

2,000

12.50

The company estimates that it can issue debt at a rate of rd = 9%, and its tax rate is 40%. It can issue preferred stock that pays a constant dividend of $4 per year at $55 per share. Also, its common stock currently sells for $40 per share; the next expected dividend, D1, is $5.00; and the dividend is expected to grow at a constant rate of 4% per year. The target capital structure consists of 75% common stock, 15% debt, and 10% preferred stock.

a.  What is the cost of each of the capital components? Round your answers to two decimal places.
Cost of debt ________ %
Cost of preferred stock ________ %
Cost of retained earnings ________ %

b.  What is Adams' WACC? Round your answer to two decimal places.
________ %

c.  Only projects with expected returns that exceed WACC will be accepted. Which projects should Adams accept?

Project 1

_________________

Project 2

_________________

Project 3

_________________

Project 4

_________________

 

 

4. WACC and Cost of Common Equity

Kahn Inc. has a target capital structure of 60% common equity and 40% debt to fund its $12 billion in operating assets. Furthermore, Kahn Inc. has a WACC of 15%, a before-tax cost of debt of 11%, and a tax rate of 40%. The company's retained earnings are adequate to provide the common equity portion of its capital budget. Its expected dividend next year (D1) is $3 and the current stock price is $21.

a.  What is the company's expected growth rate? Round your answer to two decimal places at the end of the calculations.
________ %

b.  If the firm's net income is expected to be $1.4 billion, what portion of its net income is the firm expected to pay out as dividends? (Hint: Refer to Equation below.)

Growth rate = (1 - Payout ratio)ROE

Round your answer to two decimal places at the end of the calculations.
________ %

5. Cost of Equity with and without Flotation

Javits & Sons' common stock currently trades at $23.00 a share. It is expected to pay an annual dividend of $1.00 a share at the end of the year (D1 = $1.00), and the constant growth rate is 5% a year.

 

a.  What is the company's cost of common equity if all of its equity comes from retained earnings? Round your answer to two decimal places.
________ %

b.  If the company were to issue new stock, it would incur a 17% flotation cost. What would the cost of equity from new stock be? Round your answer to two decimal places.
________ %

6. Cost of Preferred Stock Including Flotation

Trivoli Industries plans to issue perpetual preferred stock with an $11.00 dividend. The stock is currently selling for $98.50; but flotation costs will be 7% of the market price, so the net price will be $91.61 per share. What is the cost of the preferred stock, including flotation? Round your answer to two decimal places.

________

7. Cost of Common Equity with Flotation

Ballack Co.’s common stock currently sells for $54.75 per share. The growth rate is a constant 11.2%, and the company has an expected dividend yield of 3%. The expected long-run dividend payout ratio is 30%, and the expected return on equity (ROE) is 16%. New stock can be sold to the public at the current price, but a flotation cost of 5% would be incurred. What would be the cost of new equity? Round your answer to two decimal places.

________ %

8. WACC

Midwest Electric Company (MEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of rd = 9% as long as it finances at its target capital structure, which calls for 30% debt and 70% common equity. Its last dividend (D0) was $2.50, its expected constant growth rate is 5%, and its common stock sells for $28. MEC's tax rate is 40%. Two projects are available: Project A has a rate of return of 15%, while Project B's return is 11%. These two projects are equally risky and about as risky as the firm's existing assets.

 

a.  What is its cost of common equity? Round your answer to two decimal places.
________ %

b.  What is the WACC? Round your answer to two decimal places.
________ %

c.  Which projects should Midwest accept?
_________________

9. WACC

The Patrick Company's year-end balance sheet is shown below. Its cost of common equity is 17%, its before-tax cost of debt is 11%, and its marginal tax rate is 40%. Assume that the firm's long-term debt sells at par value. The firm has 576 shares of common stock outstanding that sell for $4.00 per share. Calculate Patrick's WACC using market value weights. Round your answer to two decimal places.

Assets

 

Liabilities And Equity

Cash

$ 120

     

Accounts receivable

240

     

Inventories

360

 

Long-term debt

$1,324

Plant and equipment, net

2,160

 

Common equity

1,556

Total assets

$2,880

 

Total liabilities and equity

$2,880

________ %

10. Cost of Common Equity

Percy Motors has a target capital structure of 30% debt and 70% common equity, with no preferred stock. The yield to maturity on the company's outstanding bonds is 11%, and its tax rate is 40%. Percy's CFO estimates that the company's WACC is 15.00%. What is Percy's cost of common equity? Round your answer to two decimal places.

________ %

 

 



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Due By (Pacific Time) 11/21/2013 02:00 pm
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