1) The target capital structure of Orange Corporation is 40 percent common stock, 10 percent preferred stock, and 50 percent debt.
Orange Corporation is issuing new common stock at a market price of $52. Dividends last year were $6.30 and are expected to grow
at an annual rate of 6% forever. Flotation costs will be $5 per share.
Orange Corporation is issuing a bond. Before–tax cost of debt is 12.87%. The firm’s tax rate is 34%.
The preferred stock of Orange Corporation sells for $49 and pays $4.90 in dividends. Flotation costs will be $5 per share.
a) What is Orange’s cost of common equity?
b) What will be the Orange’s after-tax cost of debt on the bond?
c) What is the Orange’s cost of capital for the preferred stock?
d) What is the Orange’s weighted average cost of capital?
2) Consider the information below from a firm's balance sheet for 2012 and 2013.
Current Assets 2012 2013 Change
Cash and Equivalents $1,561 $1,800 -$ 239
Short-Term Investments $1,052 $3,010 -$ 1,958
Accounts Receivable $3,616 $3,129 $ 487
Inventories $1,816 $1,543 $ 273
Other Current Assets $ 707 $ 601 $ 106
Total Current Assets $8,752 $10,083 -$1,331
Accounts Payable $5,173 $5,111 $ 62
Short-Term Debt $ 288 $ 277 $ 11
Other Current Liabilities $1,401 $1,098 $ 303
Total Current Liabilities $6,862 $6,486 $ 376
a) What is the Net Working Capital for 2013? What is it for 2012?
b) What is the Change in Net Working Capital (NWC)?
c) Assuming the Operating Cash Flows (OCF) are $7,155 and the Net Capital Spending (NCS) is $2,372, what is the Cash Flow from Assets?
d) Why is an understanding of cash flow so important in the study of finance?
3) Amistad Inc manufactures custom golf clubs and orders 250,000 graphite shafts per year from its manufacturer. The CEO at
Amistad wishes to know the optimal EOQ. The carrying cost is $0.45 per shaft per year. The order cost is $750 per order.
a) What is the EOQ for Amistad?
b) What are the total annual carrying costs?
c) What are the total annual ordering costs?