MGT 325 mod 5 spreadsheet Exam

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MGT 325 Module 5 Spreadsheet Exam - this is one long problem or case                    
                        
To do this exam you need to study the cases at the end of Chapter 11.  Remember that the cost of debt                  
when calculated is before tax and has to be converted to an after tax return.  The returns on preferred and                  
common stock are already after tax so are not adjusted which is in Chapter 10.                    
                        
PROBLEM FOR CHAPTERS TEN AND ELEVEN                   
Saint Leo Manufacturing is going to introduce a new product line and to accomplish this                    
it has four projects analyzed in which it wants to invest a total of $100 million.  Your job is to                    
find what it will cost to raise this amount of capital and based on the cost of capital determine which of the                   
projects should be accepted by the firm to invest in.                      
                        
 PROJECTS                   
 ABCD                   
INVESTMENT $                 30,000,000 $       20,000,000 $     25,000,000 $   25,000,000                   
EXPECTED RETURN10.00%14.00%11.50%16.00%                   
                        
The firms capital structure consists of: FMV                    
 CAPITALPERCENTAGEAMOUNT                    
 DEBT40% $     20,000,000                    
 PREFERRED STOCK15% $       7,500,000                    
 COMMON STOCK45% $     22,500,000                    
    $     50,000,000                    
Other information about the firm:                      
CORPORATE TAX RATE35%                      
 DEBT                      
CURRENT PRICE $                     1,075.00                      
ANNUAL INTEREST6.00% CURRENT INTEREST PAID SEMIANNUALLY                    
ORIGINAL MATURITY25YEARS, BUT NOW 20 YEARS LEFT                    
MATURITY VALUE $                     1,000.00                      
FLOTATION COSTINSIGNIFICANT                      
MARKET YIELD PROJECTED:                      
   UP TO $20 MILLION9%                      
   ABOVE $20 MILLION12%3 % additional premium                    
                        
 PREFERRED                      
CURRENT PRICE $                         35.00                      
LAST DIVIDEND (D0)  $                           2.63FIXED AT 7.5% OF PAR                    
FLOTATION COST $                           1.00                      
NEXT DIVIDEND (D1) $                           2.63                      
                        
 COMMON                      
CURRENT PRICE $                         25.00                      
LAST DIVIDEND (D0) $                           1.00                      
RETAINED EARNINGS $                 10,000,000                      
GROWTH RATE (g)9%                      
FLOTATION COST $                           1.50                      
NEXT DIVIDEND (D1) $                         1.090                      
                        
NOTE - Once retained earnings is maxed out new common stock will need to be issued.                    
Any preferred stock would be new preferred stock.  You may want to review case in chapter 11.                   
                        
REQUIRED:                       
                        
In all of the required parts one part builds on the previous part.  If you can't do a part use the                   
set of other numbers to solve the next part.                      
a.  What is the current Kd, Kp and Ke assuming no new debt or stock?                      
b.  Since any new capital investment will require issuing new perferred stock, what would the                    
     the new returns be preferred stock (knp) and the new cost of capital?                      
c.  What amount of increase (marginal cost of capital) in capital structure will the firm run                    
     out of retained earnings and be forced to issue new common stock?                    
d.  If new common stock has to be issued what will the new return required be (Kne) and the                   
     new cost of capital?                      
                        
Note:  All Answers Should Be Taken Out to 2 Decimal Places, Especially the Interest Rate Answers.                   
                        
Part a                       
Current price $                       
Maturity value $                       
Interest payment $                       
Payment periods                       
Yield rate%                      
Annual yield%                      
Kd%                      
Kp%                      
Ke%                      
Current Cost of capital%                      
                        
                        
Part b                       
Use your solutions in Part a to do this part, but if you couldn't complete Part a, assume Kd=4%, Kp=8%, and Ke=13%; =%                 
Knp preferred stock%                      
New cost of capital%                      
                        
Part c                       
If the capital structure increases more than  $                      
new common stock will have to be issued to finance new projects since internally generated RE runs out,                  
and the required return on common stock will increase as demanded by shareholders.                   
                        
Part d                       
Kne common stock%                      
If you could not come up with the Kne common stock returns, do the cost of capital assuming Kd=5%, Knp=9%, and Ke=14%=%                 
New cost of capital%                      
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