| 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 |
| | 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 | 40% | $ 20,000,000 |
| | PREFERRED STOCK | 15% | $ 7,500,000 |
| | COMMON STOCK | 45% | $ 22,500,000 |
| | | | $ 50,000,000 |
| Other information about the firm: |
| CORPORATE TAX RATE | 35% |
| | DEBT |
| CURRENT PRICE | $ 1,075.00 |
| 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 | $ 35.00 |
| LAST DIVIDEND (D0) | $ 2.63 | FIXED 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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mgt_325_mod_5_spreadsheet_exam.xls
