MGT 325 Module 5 Spreadsheet Exam(Saint Leo)

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

A B C D

INVESTMENT $30,000,000 $20,000,000 $25,000,000 $25,000,000

EXPECTED RETURN 10.00% 14.00% 11.50% 16.00%



The firms capital structure consists of: FMV

CAPITAL PERCENTAGE AMOUNT

DEBT 30% $15,000,000

PREFERRED STOCK 10% $5,000,000

COMMON STOCK 60% $30,000,000

$50,000,000

Other information about the firm:

CORPORATE TAX RATE 30%

DEBT

CURRENT PRICE $1,050.00

ANNUAL INTEREST 6.00% CURRENT INTEREST PAID SEMIANNUALLY

ORIGINAL MATURITY 25 YEARS, BUT NOW 20 YEARS LEFT

MATURITY VALUE $1,000.00

FLOTATION COST INSIGNIFICANT

MARKET YIELD PROJECTED:

UP TO $20 MILLION 9%

ABOVE $20 MILLION 12% 3 % additional premium



PREFERRED

CURRENT PRICE $45.00

LAST DIVIDEND (D0) $3.38 FIXED AT 7.5% OF PAR

FLOTATION COST $1.50

NEXT DIVIDEND (D1) $3.38



COMMON

CURRENT PRICE $35.00

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.