Capital Structure- The corporate treasurer of Ajax Company expects the company to grow at 4% in the future

Capital Structure

1

The corporate treasurer of Ajax Company expects the company to grow at

4% in the future, and debt securities

at 6% interest (tax rate = 30%) to be a cheaper option to finance the growth.

The current market price per share

of its common stock is $39, and the expected dividend in one year is $1.50 per share. Calculate the cost of the company's

retained earnings and check if the treasurer's assumption is correct.

2

The risk-free rate on 10-year U.S. Treasury bills is 3% and the expected rate of return on the overall stock market is 11%.

The company has a beta of 1.6. What is the cost of equity?

3

A company has a capital structure as follows:

Total Assets

$600,000

Debt

$300,000

Preferred Stock

$100,000

Common Equity

$200,000

What would be the minimum expected return from a new capital investment

project to satisfy the suppliers of the capital?

Assume the applicable tax rate is 40%, interest on debt is 11%, flotation cost

per share of preferred stock is $0.75, and

flotation cost per share of common stock is $4. The preferred and common

stocks are selling in the market for $26 and $143

a share respectively, and they are expected to pay a dividend of $2 and $7, repectively,  in one year. The company's dividends

are expected to grow at 13% per year. The firm would like to maintain the

existing capital structure to finance the new

project.

4

Required rate of return is 10%.

Net Cash Flow

Year

Project A

Project B

0

-$2,000

-$2,500

1

$900

$1,500

2

$1,100

$1,300

3

$1,300

$800

a

Calculate the payback period for each project.

b

Calculate the net present value for each project.

c

Which project do you think will be approved, if only one project can be approved? Why?

d

What if the required rate of return was 20%?

5

A corporate bond has a face value of $1,000 and an annual coupon interest

rate of 7%. Interest is paid annually.

10 years of the life of the bond remain. The current market price of the bond

is $872. To the nearest whole percent,

what is the yield to maturity (YTM) of the bond today?

6

Ajax Manufacturing dividend is $8 per share of common stock in one year. The dividend growth rate is 3%.

Required rate of return is 14%.

a

What is the current market price per share?

b

What is the annual rate of return if you purchase the stock at $65?

7

A common stock sells for $82 per share, has a growth rate of 7% and a

dividend that was just paid of $3.82. What is the

annual percent yield per share?

D₀ = $3.82 and therefore D₁ = $3.82 x 1.07 =

$4.09

8

A corporate bond has a face value of $1,000 and an annual coupon interest rate

of 6%. Interest is paid annually.

12 years of the life of the bond remain. The current market price of the bond is $1,027, and it will mature at $1,100.

To the nearest whole percent, what is the yield to maturity (YTM) of the bond

today?