Finance - Capital Structure

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Capital Structure

Problem Assignments and Solutions - Capital Structure
Calculate the correct answer in all problems
USE NPV, Rate, and IRR Functions as appropriate in Problems 4b, 4d. 4e, 5, and 8
Explain in words what you do to make each calculation
Explain in words what the answers mean
Points
1
10
Answer: Cost of debt after tax is 2.60%
Cost of retained earnings is 7.95%
2-A 3
Answer: The cost of equity is 8.70%
2-B
7
Answer: You calculate
3 A company, East Berwick Enterprises, has a capital structure as follows:
Total Capital $1,000,000
Debt $400,000
Preferred Stock $100,000
Common Equity $500,000
15
Answer:
Cost of debt after tax is 3.00%
Cost of preferred stock is 6.45%
Cost of common stock is 8.57%
WACC is 6.13%
4
Net Cash Flow
Year Project A Project B
0 -$8,000,000 -$10,000,000
1 $1,600,000 $3,900,000
2 $1,850,000 $3,700,000
3 $2,150,000 $3,400,000
4 $2,400,000 $900,000
5 $2,600,000 $300,000
6 $2,800,000 $0
4-A Calculate the payback period for each project. Do Not use the discounted payback method.
Project A Project B
Answer: 4.00 2.71 Payback Period in years. 6
4-B Calculate the net present value for each project.
Project A Project B
Answer: $2,730,758.78 $736,096.81 Net Present Value 6
4-C Which project do you think will be approved, if only one project can be approved? Why?
Project A Project B
Answer: Yes No Your answer to Why? 3
4-D What if the required rate of return was 10%?
Answer: Project A Project B
$1,432,952.63 ($41,235.39) Net Present Value 6
Yes No
4-E What is the Internal rate of return?
Answer: Project A Project B 6
15.33% 9.78%
4-F Which is the best to use for deciding: Payback, NPV or IRR? Why? 8
Answer: Your answer
5
6
Answer: 3.61%
6-A
6
Answer: $100.00
6-B
6
Answer: 7.21%
7
6
Answer: 9.60%
8
6
Answer: 3.82%
Total Points 100
The corporate treasurer of Gonic Manufacturing Company expects the company to grow at 4% in the future. She notes that debt will have an interest rate of 4% interest and the corporate tax rate is 35%. She believes that debt will be a cheaper option to finance the growth. The current market price per share of its common stock is $19, and the expected dividend in one year is $0.75 per share. Calculate the cost of the company's retained earnings and check if the treasurer's assumption is correct.
The risk-free rate on 30 year U.S. Treasury bonds is 2.75% and the expected rate of return on the overall stock market is 7%. The BOW company has a beta of 1.4. What is the cost of equity?
Les argues that the 10 year note is a better risk free rate at 2%. He also argues that the stock market is too high and the expected return is really only 5%. Assume that he is correct. The company has a beta of 1.4. What is the cost of equity?
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 5%, 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 $24 and $130 a share respectively, and they are expected to pay a dividend of $1.50 and $4.50, respectively, in one year. The company's dividends are expected to grow at 5% per year. The firm would like to maintain the existing capital structure to finance the new project.
The minimum expected return from a new capital investment project is the WACC plus any additional risk premium. Since no additional risk is mentioned, we will use the WACC. The results of the calculations are below.
East Berwick is considering two projects for a new investment, but it can afford only one. It has determined that the appropriate discount rate is 6.13%. Please answer the following questions based on the data below:
A corporate bond for Chase Corp. has a face value of $1,000 and an annual coupon interest rate of 6%. Interest is paid annually. 10 years of the life of the bond remain. The current market price of the bond is $1,198. To the nearest 1/100 0f 1 percent, what is the yield to maturity (YTM) of the bond today?
Kennebunkport Manufacturing is expected to pay a dividend of $4 per share next year.  The dividend growth rate is expected to continue to be 3%. Required rate of return is 7%. What should be the current market price per share?
If you buy the stock in Kennebunkport Manufacturing (above) at $95 and the stock price grows at the expected rate, What would be your percent return after one year?
On October 15, 2015, A common stock of Nasson Co. sells for $42 per share, has a growth rate of 5% and a dividend that was just paid of $1.84 in December 2014. What is the annual percent yield per share?
A corporate bond for the Maryland Company, LTD has a face value of $1,000 and an annual coupon interest rate of 5%. Interest is paid annually. 12 years of the life of the bond remain. The current market price of the bond is $1,112, and it will mature at $1,000. To the 1/100 percent, what is the yield to maturity (YTM) of the bond today?