Calculations Shown

1) (Defining capital structuer weights) Templeton Extended Care Facilities, Inc. is considering the acquisition of a chain of cemetreries for $400 Million. SInce the primary asset of theis business is real estate, Templeton's management has determined that they will be able to borrow the majority of the money needed to buy the business. The current owners have the debt financing but Templeton plans to borrow $300 million and invest only $100 million in equity in the acquisition. What weights should Templeton use in computing the WACC for this acquisition? THe appropriate w d weight is (blank) % (Round to one decimal Place.).

2) You firm is considering a new investment proposal and would like to calculate its weighted average cost of capital. To help in this, compute the cost of capital for the firm for the following:

A bond that has a 1,000 par value and a contract or coupon interest rate of 10.9%. The bonds have a current market value of $1,121 and will mature in 10 years. The firms marginal tax rate is 34%.
What is the cost of capital from this bonds debt?

A new common stock issue that paid a $1.84 dividend last year. The firms dividends are expected to from at 6.7% per year forever. The price of the firms common stock is now $27.53.

A preferred stock paying a 8.9% dividend on a 119 par value

A bond selling to yield 12.9%where the firms tax rate is 34%

3) As a consultant to GBH Skiwear, you have been asked to calculate the appropriate discount rate to use in the evaluation of the purchase of a new warehouse facility. You have determined the market value of the firm’s current capital structure as follows:

Bonds = $490,000 Preferred Stock = $100,000 Common Stock = $400,000. To finance the purchase GBH will sell 20 year bonds with a $1000 par value paying 8.1% per year (paid semiannually) at the market price of $972. Preferred stock paying a $2.47 dividend can

be sold for $34.94. Common stock for GBH is currently selling for $50.78 per share. The firm paid a $4.07 dividend last year and expects dividends to continue growing at a rate of 4.1% per year into the indefinite future. The firm’s marginal tax rate is 34%.

1) The weight of debt in the firm’s capital structure is? 2) The weight of preferred stock in the firm’s capital structure is? 3) The weight of common stock in the firm’s capital structure is? 4) The after tax cost of debt for the firm is? 5) The cost of preferred

stock for the firm is? 6) The cost of common equity for the firm is? 7) The discount rate you should use to evaluate the warehouse project is?

4.  You have developed the following income statement for the Hugo Boss Corporation. It represents the most recent year’s operations, which ended yesterday.

Your supervisor in the controller’s office has just handed you a memorandum asking for written responses to the following questions:

a. What is the firm’s break-even point in sales dollars?

b. If sales should increase by 30 percent, by what percent would earnings before taxes (and net income) increase?

5. CSB, Inc has a beta of .765. If the expected market return is 10.5 percent and the risk free rate is 3.5 %, what is the appropriate expected return of CSB (using the CAPM)

6. The expected return for the general market (rMKT) is 12.8 percent, and the market risk premium (i.e., RPM) is 4.3 percent. Moe, Larry, and Curley have betas of 0.82, 0.57, and 0.68, respectively. What are the required rates of return for the three securities?

7. James Fromholtz is considering whether to invest in a newly formed investment fun. The funds objective is to acquire home mortgage properties at what it hopes to be bargain prices. The fund sponsor has suggested to James that the funds performance will hinge on how the national economy performs in the coming year. Specifically he suggested the following outcomes. State of economy Probability Fund Returns

Rapid expansion and recovery 15% 100%

Modest growth 50% 40%

continued recession 20% 20%

falls into depression 15% -100%

A) Based on these potential outcomes what is your estimate of the expected rate of return from this investment opportunity?

B) Calculate the standard deviation in the anticipated returns found in part a?

C) Would you be interested in making such an investment?