Posted by shirley on Friday, February 10, 2012 at 3:59pm.
1. The target structure for QM industries is 38% common stock, 15% preferred stock, and 47% debt. If the cost of common equity for the firm is 17.3%, the cost of preferred stock is 9.3%, the before tax cost is 8.9%, and the firms tax rate is 35%, what is the QM's weighted average cost per capital?
2. Crypton electronics has a capital structure consisting of 41% common stock and 59% debt. A debt issue of $1,000 par value, 6.1% bonds that mature in 15 years and pay annual interest will sell $974. Common stock of the firm is currently selling for $29.18 per share and the firm expects to pay $2.23 dividend next year. Dividends have grown at the rate of 4.7% per year and are expected to continue to do so for the foreseeable future. What is the Crypton's cost of capital where the firm's tax rate is 30%?
3. The target capital structure for Jowers Manufacturing is 49% common stock, 15% preferred stock, and 36% debt. If the cost of equity for the firm is 19.4%, the cost of preferred stock is 11.6%, and the before-tax cost of debt is 9.1%, what is Jower’s cost of capital? The firm’s marginal tax rate is 34 percent.
4. As a member of the Finance Department of Ranch Manufacturing, your supervisor has asked you to compute the appropriate discount rate of use when evaluating the purchase of new packing equipment for the plant. You have determined the market value of the firm's capital structure as follows: Source of Capital Market Values Bonds 4,400,000 Preferred Stock 1,900,000 common Stock 5,900,000 To finance the purchase, Ranch Manufacturing will sell 10-year bonds paying 6.8% per year at the market price of $1042. Preferred Stock paying $2.02 dividend can be sold $24.53; Common Stock for Ranch Manufacturing is currently selling for $55.71 per share. The firm paid a $3.06 dividend last year and expects dividends to continue growing at a rate of 4.6% per year. The firm's tax rate is 30%.
5. Abe Forrester and three of his friends from college have interested a group of venture capitalists in backing their business idea. The proposed operation would consist of a series of retail outlets to distribute and service a full line of vacuum cleaners and accessories. These stores would be located in Dallas, Houston, and San Antonio. To finance the new venture two plans have been proposed.
Plan A is an all-common-equity structure in which 2.2 million dollars would be raised by selling 84,000 common stock
Plan B would involve issuing $1.3 million dollars in long term bonds with an a effective interest rate of 12.2% plus $0.9 million would be raised by selling 42,000 share of common stock. The debt funds raised under plan B have no fixed maturity date, in that this amount of finance leverage is considered a permanent part of the firms 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 $
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 or Plan B is chosen
6. Recent graduates of the computer science program at the University of Tennessee are forming a company that will write and distribute new application software for the IPhone. The stores would be located in TN, GA, NC, and SC. To finance the new venture 2 plans have been proposed:
Plan A: is an all common equity structure in which $2.1 million dollars would be raised by selling common stock selling @ $10 per share
Plan B: would involve the use of financial leverage. $1.3 million dollars would be raised by selling bonds w/ an effective interest rate at 11.1% (per annum) and the remaining would be raised by selling the common stock @ $10 per share. The use of the 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 this analysis.
a. Find the EBIT indifference level associated w/ the 2 financing plans
b. a detailed financial analysis of the firms prospects suggests that the long term EBIT will be above $331,000 annually. Taking this into consideration, which plan will generate the higher EPS? (round to the nearest dollar)
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