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Question-1 Templeton Extended Care Facilities Inc is considering the acquisition of a chain of cemeteries for $400 million. since the primary asset of this business is real estate, Templeton's management has determined that they will be able to borrow the majority of the money needed to buy the business. The current owners have no debt financing but Templeton plans to borrow $300 million and invest only $100 million in equity in the acquisition. What weights should Templeton use in computing the WACC for this acquisition? Round to one decimal place. The appropriate weight of debt Wd is The appropriate weight of common equity Wcs is Question-2 2). Compute the cost of capital for the firm for the following: a). A bond that has a $1,000 par value (face value) and a contract or coupon interest rate of 10.9%. The bonds have a current market value of $1,125 and will mature in 10 years. The form's marginal tax rate is 34% . aa). Theafter-tax cost of debt is _% (round to two decimals places) b). A new common stock issue that paid a $1.78 dividend last year. The firm's dividends are expected to continue to grow at 7.6% per year forever. The price of the firm's common stock is now $27.29. bb). The cost of common equity is _% (round to two decimal places) c). A preferred stock that sells for $146 pays a dividend of 8.2 percent and has a $100 par value. cc). The cost of the preferred stock is _% (round to two decimal places) d). A bond selling to yield 11.8% where the form's tax rate is 34%. dd). After tax cost of debt is _% (round to two decimal places) Question-3 (Cost of Preferred Stock) The preferred stock of Gator Industries sells for $35.89 and pays $2.76 per year in dividends. What is the cost of preferred stock financing? If Gator were to issue 521,000 more preferred shares just like the ones it currently has outstanding, it could sell them for $35.89 a share but would incur flotation costs of $2.88 per share. what are the flotation costs for issuing the preferred shares and how should this cost be incorporated into the NPV of the project being financed? Question-4 (Cost of Debt) The Walgren Corporation is contemplating a new investment to be finance using one-third from debt. The firm could sell new $1,000 par value bonds with a 15-year maturity at a price of $947 that carry a coupon interest rate is 12.7 % that is paid semiannually, and the bonds would mature in fifteen years. If the company is in a 34% tax bracket, what is the after-tax cost of capital to Walgren for bonds? Question-5 (Cost of Debt) Gillian Stationery Corporation needs to raise $600,000 to improve its manufacturing plant. It has decided to issue a $1,000 par value bond with a coupon rate of 8% with interest paid semiannually and a 10-year maturity. If the investors require a 10% rate of return: a. Compute the market value of the bonds. b. How many bonds will the firm have to issue to receive the needed funds? c. What is the firm’s after-tax cost of debt if the firm’s tax rate is 34 percent? Question-6 (Weighted average cost of capital) As a consultant to GBH Skiwear, you have been asked to compute the appropriate discount rate to use in the evaluation of the purchase of a new warehouse facility. You have determined the market value of the firm’s current capital structure (which the firm considers to be its target mix of financing sources) as follows: Source of Capital Market Value Bonds $530,000 Preferred stock $120,000 Common stock $450,000 To finance the purchase, GBH will sell 20-year bonds with a $1,000 par value paying 7.9% per year at the market price of $958. Preferred stock paying a $2.52 dividend can be sold for $35.23. Common stock for GBH is currently selling for $50.04 per share. The firm paid a $4.05 dividend last year and expects dividends to continue growing at a rate of 3.9% per year into the indefinite future. The firm’s marginal tax rate is 34%. What discount rate should you use to evaluate the warehouse project? Question-7 Lowe’s Companies, Inc. (LOW) and its subsidiaries operate as a home improvement retailer in the United States and Canada. As of February 1, 2008, it operated 1,534 stores in 50 states and Canada. The company’s balance sheet for February 1, 2008, included the following sources of financing: In Thousands of Dollars Financial Structure Liabilities Current liabilities Accounts payable ……………………….. $ 4,137,000 Short-term/current debt …………………. 1,104,000 Other current liabilities …………………. 2,510,000 Total current liabilities …………………. $ 7,751,000 Long-term debt ………………………… 5,576,000 Other long-term liabilities ……………… 670,000 Long-term liabilities ……………………. $ 6,246,000 Stockholder equity …………………….. $16,098,000 Total …………………………………… $30,095,000 a. Calculate the values of Lowe’s debt ratio and interest-bearing debt ratio. b. If the market value of Lowe’s common equity is $35.86 billion and Lowe’s has no excess cash, what is the firm’s debt-to-enterprise-value ratio? Question-8 (Computing interest tax savings) Dharma Supply has earnings before interest and taxes (EBIT) of $511,000, interest expenses of $323,000 and faces a corporate tax rate of 34 percent. a. What is Dharma Supply's Net Income? b. what would dharmas net income be if it didnt have any debt? c. what are the firms interest tax savings? Question-9 You have developed the following pro forma income statement for your corporation. It represents the most recent years operations, which ended yesterday. Your supervisor in the controllers office has just handed you a memorandum asking for written responses to the following questions: a. If Sales Should increase by 20%, by what percent would earnings before interest and taxes and net income increase? b. If sales should decrease by 20% by what percent would earnings before interest and taxes and net income decrease? c. If the firm were to reduce its reliance on debt financing such that interest expense were cut in half, how would this affect your answers to parts A and B? Question-10 (Capital Asset Pricing Model) CSB, Inc has a beta of 0.765. If the expected market return is 10.5 percent and the risk free rate is 3.5 percent, what is the appropriate expected return of CSB(using the CAPM)? Question-11 (Capital Asset Pricing Model) The expected return for the general market is 10.5 percent, and the risk premium in the market is 7.0%. Tasaco, LBM, and Exxos have betas of 0.828, 0.612 and 0.509, respectively. What are the corresponding required rates of return for the three securities? Question-12 James Fromholtz is considering whether to invest in a newly formed investment fund. The fund’s investment objective is to acquire home mortgage securities at what it hopes will be bargain prices. The fund sponsor has suggested to James that the fund’s performance will hinge on how the national economy performs in the coming year. Specifically, he suggested the following possible outcomes: a. Based on these potential outcomes, what is your estimate of the expected rate of return from this investment opportunity? b. Would you be interested in making such an investment? Note that you lose all your money in one year if the economy collapses into the worst state or you double your money if the economy enters into a rapid expansion. c. Would you be interested in making such an investment?
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