001. The target capital structure for QM industries is 41% common stock, 8% preferred stock, and 51% debt. If the cost of common equity for the firm is 17.7%, the cost of preferred stock is 9.7%, the before-tax cost of debt is 8.7%, and the firm's tax rate is 35%, what is QM's weighted average cost of capital? (Round to three decimal places)
002. Crypton electronics has a capital structure consisting of 43% common stock and 57% debt. A debt issue of $1,000 par value, 5.6% bonds that mature in 15 years and pay annual interest will sell for $978. Common stock of the firm is currently selling for $29.58 per share and the firm expects to pay a $2.22 dividend next year. Dividends have grown at the rate of 5.4% per year and are expected to continue to continue to do so for the forseeable future. What is Crypton's cost of capital where the firm's tax rate is 30%? (round to three decimal places)
003. The target capital structure for Jowers Manufacturing is 50% common stock, 17% preferred stock, and 33% debt. If the cost of common equity for the firm is 20.5%, the cost of preferred stock is 12.7%, and the beforetax cost of debt is 10.6% what is Jower's cost of capital? The firm's tax rate is 34%? (round to three decimal places)
004. As a member of the finance department of ranch manufacturing, your supervisor has asked you to compute the discount rate to use when evaluating the purchase of new packaging equipment for the plant. Under the assumption that the firm's present capital structure reflects the appropriate mix of capital sources for the firm, you have determined the market value of the firm's capital structure as follows:
Source of Capital Market Value
Preferred Stock 1,900,000
Common Stock 5,700,000
To finance the purchase, Ranch Manufacturing will sell 10-year bonds paying 7.1% per year at the market price of $1,049. Preferred stock paying a $1.99 dividend can be sold for $24.03. Common stock for Ranch Manufacturing is currently selling for $54.84 per share and the firm paid a $3.02 dividend last year. Dividends are expected to continue growing at a rate of 5.2% per year into the indefinite future. If the firm's tax rate is 30%, what discount rate should you use to evaluate the equipment purchase? Ranch manufacturing's WACC is % (round to three decimal places).
005) Plan A is an all-common-equity structure in which $2.1 million dollars would be raised be selling 80,000 shares of common stock.
Plan B would involve issuing $1.5 million dollars in long-term bonds with an effective interest rate of $11.8 plus $0.6 million would be raised by selling 40,000 shares of common stock. The Debt funds raised under Plan B have no fixed maturity date, in that this amount of financial leverage is considered a permanent part of the firm's capital structure. Abe and his partners plan to use 40% tax rate in their analysis, and they have hired you on a consulting basis to do the following:
A) Find the EBIT indifference level associated with the two financing plans. (Round to the nearest dollar)
B) Prepare a pro forma income statement for the EBIT level solved for in Part A. that shows that EPS will be the same regardless whether Plan A and B is chosen.
006) The first (Plan A) is an all common-equity capital structure. $2.4 million dollars would be raised by selling common stock at $10 per common share.
Plan B would involve the use of financial leverage. $1.1 million dollars would be raised by selling bonds with an effective interest rate at 10.6% (per annum), and the remaining $1.3 million would be raised by selling common stock at the $10 price per share. The use of financial leverage is considered to be a permanent part of the firm's capitalization, so no fixed maturity date is needed for the analysis. A 35% tax rate is deemed appropriate for the analysis.
A) Find the EBIT indifference level associated with the two financing plans.
B) A detailed financial analysis of the firm's prospects suggests that the long-term EBIT will be above $344,000 annually. Taking this into consideration, which plan will generate the higher EPS?