debe (1 4 ~ Ty ise dicate by «plas have a in constant Be arts ecb rule though oxporate) skal hich Is thee 10%. what risk procs? 0a) Prox con tats (103) Teller Sak 04) Ct Paired Sok as) Self-Test Problem solution Appears in Appendix A Longstreet Communications Inc. (LCD has the following capital structure, tech i considers to be optimal: debt = 25%, prefered stock = 15%, and common, Thock = 60%. LCs tax rte i 08 and investors expect eamings and dividend to row ata constant ate of 6% in the future, LCT pald a dividend of 8370 per share Es yonr (D), and its stock currently sells ata price of $0 per share. Treasury bonds yield the market sk premium is 3%, and LCT bets is 13. These terms ‘would apply #o new security oferings: prefered: New preferred could be sold to the publica price of $100 per share, with a dividend of §9. Flotation costs of $5 per share would be fncured Debt, Debt could be soldat an interest ate of 9% 4 Find the component costs of debt, prefered stock, and common stock. “Assume LCI does not have to iste any additional shares of common stock Whats the WACC? Problems Answers Appeor in Appendix B Calculate the afer tax ost of debt under each ofthe following conlitions fs Interest ate, 13%; tax rate, OF. 1, Interest ate, 13% tax rate, 20%. Interest ate, 13% tx rate, 35% LL ncorporated’s curently outstanding 11% coupon bonds havea yield tomat- Fity of 82. LL believes it could lsue at par new Bonds that would providea sim- ay yield to maturity I ite marginal lax sate i 39%, shat bs LU aftertax cost of debe? Dug Veterinary Supplies ca issue perp preferred stock at a price of $50, f share. Theisue ls expected to pay a constant anual dividend of 50a share Tgnorng flotation costs, what s the company's cost of prefered stock, 2 Burnwyood Tech plans to issue some $80 par preferred stock with a 6% dividend, ‘The stock i sein om the market for $7000, and Burnwvood must pay flotation nts ofS of the market price. What is the cost ofthe preferred stock? ‘Summerdail Resorts’ common stocks currently trading at $96a share. The stock iz expected to pay a dividend of S300. share atthe end ofthe yea (D, = $3.0, nd Ine dividend fo expected to grow ata constant rate of 5% Year. What isthe est of common equity?370 hole 10 08) ot ay CAP 07, ace Intermediate Probleme 94 09) sand Yad ond econ Conch (10-10 cont uy om cout Ea (10-13 alton of poses The Cot of Copel Bootier Book Store has a beta of (8. The yield on 3-month Fils 45 ang Yield on a 10-year ond is 6%. The market isk premium i 55%, buy ‘market return in the previous years was 158. What ls the estimated oot ai mon equity using the CAPM? bt, $80 milion inp sl common equ. Sh faces 40% tax rete ap ‘58%, and r, = 12%, IfSh has a target capiatg ture of 30% debi, 5% prefered stock and 65% common stock, wiat kg Wace? David Orie Motors has a orget capita strctare of 405% deb and 60% eau yield to maturity onthe company’s outstanding bonds is 9%, and the cng tax rate is 40%, Ortz's CFO has calculated Uh company's WACC as 9965) is the company’s cont of exuity capital? ‘A company’s 6% coupon rate, semiannual piyment, $1,000 par value bond ‘matures in 30 years sells ata price of $515.16: Ihe company’s federal plos sat ‘ates 40, What isthe firm's component cos of debt for purposes of call the WACC? (Hint Base your answer on the na rate) ‘The eamings, dividends and stock price of Selby Inc. are expected to grow at _per yer in the future. Shelby’s common stcksells fr $23 per share is ast tend was $200, and the company wil pay s dividend of $2.14 atthe end of current yea, 8. Using the discounted cash flow approach, what ists cost of equity? 'b._fthe firm's beta is 1.6, the vsktre rate 9% and the expected return on market is 19%, what will be the firm's cost of equity using the approach? the ims bonds eam a return of 12%, what wil, be using the bondi plus-sk-premium approach? (Hint Use the midpoint of the risk prem ange) (On the bass of the results of perts a thrugh ¢, what would you et Shelbys cost af equity to be? Radon Homes custent EPS $650 It was $4425 years ag. The compary 2 cut 0% of is ernngs x dvders andthe tock el for 36 2° Calle the past growth ate in earings in Thi «year go red) 1 Galette he nxt expeced vend per share Dy [, = 04650) = 2 Assume thatthe pat growth rate wll continue What ethe conto egy y fr Radon Homes? Spencer Supplies’ stock s current selling for Sé0 a share. The frm s expected ‘eam $540 per share this year an to pay a yearend dividend of 8360 4 Hinvestos require a 95 return, what rate of growih must be expected Spencer?no rece 7 Te Con of Dot ton Cate Changing are ts ad tthe end city? 0-16 Moke Ve copil b. If Spencer reinvests earings in projects with average returns equal tothe stock's expected rate of return, what wil be nest year’s EPS? [Hint g = ROE(Retenton ratio) Messman Manufacturing will ssue common stock to the public for $40. The expected dividend and growth in dividends are $00 per share and 3, epee tively I the flotation costs 10% ofthe eve proceeds, what isthe cost of external ell 1? Suppose a company will issue new 20-year deb with a par vale of $1,000 and a ‘coupon rate of %, paid annually. The ox rate ls 4% Ifthe lotation coat fs 2 of ‘the isue proceed, what i the after-tax cost of debt? (Om January 1, the total market value ofthe Tsseland Company was $0 million During the yar, the company plan to raise and invest $30 million in new prof ts. The fim’s present market valu capita structure, shown bel is considered fo be optimal. Assume tha there is no shorterm debt Debt $30,000000 ‘Common equity 30,000,000, Total capital 0,000 | [New bonds will have an 8% coupon rate and they wil be soldat pat. Common stock i curemtly sling at §30 + share. Slockhalders’ required rate of return fe cstmated to be 12%, consisting ofa dividend yield of 4% and an expected con stant growth rate of 8%. (The next expected dividend fs $1.20, 00 81.20/590 = 4) ‘Themarginal corporate tx ates ‘To maintain the present capital suucture, how much of the new investment ‘must be financed by common equity? . Assume that there is sufficient cash Row such that Tysseland can maintain its target capital structure without suing additonal shares of equity What isthe WACC? ‘Suppose now that there is not enough intel cashflow and the firm must fasue new shares of stock, Qualltatvely speaking, what will happen to the Wace? ‘Suppose the Schoof Company has this book elu balance shee: Current assets $30000000 Carre abies 1003.00 Fredassets 5000000 Long-term debe so.om 00 Common equity (0 miton sae) 1.000000 Retin earings 200.000 Tolan $90000000 Tea claims 2009000