Description of this paper

WACC Calculation problems

Description

solution


Question

WACC Calculation problems;PROBLEMS;WACC Calculation;1. Blazingame Inc.'s capital components have the following market values;Debt $35,180,000;Preferred Stock $17,500,000;Common Equity $48,350,000;Calculate the firm's capital structure and show the weights that would be used for a weighted average cost of capital (WACC) computation.;2. The Aztec Corporation has the following capital components and costs. Calculate Aztec's WACC.;Component Value Cost;Debt $23,625 12.0%;Preferred Stock $ 4,350 13.5%;Common Equity $52,275 19.2%;3. Willerton Industries Inc. has the following balances in its capital accounts as of 12/31/x3;Long Term Debt $65,000,000;Preferred Stock $15,000,000;Common Stock $40,000,000;Paid in Excess $15,000,000;Retained Earnings $37,500,000;Calculate Willerton s capital structure based on book values.;5. Again referring to Willerton of the two previous problems, assume the firm s cost of retained earnings is 11% and its marginal tax rate is 40%, calculate its WACC using its book value based capital structure ignoring floatation costs. Make the same calculation using the market value based capital structure. How significant is the difference?;6. A relatively young firm has capital components valued at book and market and market component costs as follows. No new securities have been issued since the firm was originally capitalized.;Values Market;Component Market Book Cost;Debt $42,830 $40,000 8.5%;Preferred Stock $10,650 $10,000 10.6%;Common Equity $65,740 $32,000 25.3%;a. Calculate the firm's capital structures and WACCs based on both book and market values, and compare the two.;b. What appears to have happened to interest rates since the company was started;c. Does the firm seem to be successful Why;d. What would be the implication of using a WACC based on book as opposed to market values In other words, what kinds of mistakes might management make by using the book values?;7. Five years ago Hemingway Inc. issued 6,000 thirty-year bonds with par values of $1,000 at a coupon rate of 8%. The bonds are now selling to yield 5%. The company also has 15,000 shares of preferred stock outstanding that pay a dividend of $6.50 per share. These are currently selling to yield 10%. Its common stock is selling at $21, and 200,000 shares are outstanding. Calculate Hemingway s market value based capital structure.;8. The Wall Company has 142,500 shares of common stock outstanding that are currently selling at $28.63. It has 4,530 bonds outstanding that won t mature for 20 years. They were issued at a par value of $1,000 paying a coupon rate of 6%. Comparable bonds now yield 9%. Wall s $100 par value preferred stock was issued at 8% and is now yielding 11%, 7,500 shares are outstanding. Develop Wall s market value based capital structure.;9. The market price of Albertson Ltd. s common stock is $5.50, and 100,000 shares are outstanding. The firm's books show common equity accounts totaling $400,000. There are 5,000 preferred shares outstanding that originally sold for their par value of $50, pay an annual dividend of $3, and are currently selling to yield an 8% return. Also, 200 bonds outstanding that were issued five years ago at their $1,000 face values for 30-year terms pay a coupon rate of 7%, and are currently selling to yield 10%. Develop Albertson's capital structure based on both book and market values.;10. Asbury Corp. issued 30-year bonds 11 years ago with a coupon rate of 9.5%. Those bonds are now selling to yield 7%. The firm also issued some 20-year bonds two years ago with an 8% coupon rate. The two bond issues are rated equally by Standard and Poors and Moody s. Asbury s marginal tax rate is 38%.;a. What is Asbury s after-tax cost of debt;b. What is the current selling price of the 20-year bonds?;11. The Dentite Corporation s bonds are currently selling to yield new buyers a 12% return on their investment. Dentite s marginal tax rate including both federal and state taxes is 38%. What is the firm s cost of debt?;12. Kleig Inc.'s bonds are selling to yield 9%. The firm plans to sell new bonds to the general public and will therefore incur flotation costs of 6%. The company's marginal tax rate is 42%.;a. What is Kleig's cost of debt with respect to the new bonds? (Hint: Adjust the cost of debt formula to include flotation costs.);b. Suppose Kleig also borrows directly from a bank at 12%.;1. What is its cost of debt with respect to such bank loans? (Hint: Would bank loans be subject to flotation costs?);2. If total borrowing is 60% through bonds and 40% from the bank, what is Kleig's overall cost of debt (Hint: Think weighted average.);Cost of Preferred Stock: Example 13-4 (page 568);13. Harris Inc. s preferred stock was issued five years ago to yield 9%. Investors buying those shares on the secondary market today are getting a 14% return. Harris generally pays flotation costs of 12% on new securities issues. What is Harris s cost of preferred financing;14. Fuller, Inc. issued $100, 8% preferred stock five years ago. It is currently selling for $84.50. Assuming Fuller has to pay floatation costs of 10%, what is Fuller s cost of preferred stock?;15. A few years ago Hendersen Corp issued preferred stock paying 8% of its par value of $50. The issue is currently selling for $38. Preferred stock flotation costs are 15% of the proceeds of the sale. What is Hendersen's cost of preferred stock?;16. New buyers of Simmonds Inc. stock expect a return of about 22%. The firm pays flotation costs of 9% when it issues new securities. What is Simmonds cost of equity (Hint: This problem is very simple since we don t have to estimate the investors return.);a. From retained earnings?;b. From new stock?;17. Klints Inc. paid an annual dividend of $1.45 last year. The firm s stock sells for $29.50 per share, and the company is expected to grow at about 4% per year into the foreseeable future. Estimate Klints cost of retained earnings.;Cost of RE and New Stock: Examples 13-6 and 13-8 (pages 570 and 572);18. The Pepperpot Company's stock is selling for $52. Its last dividend was $4.50, and the firm is expected to grow at 7% indefinitely. Flotation costs associated with the sale of common stock are 10% of the proceeds raised. Estimate Pepperpot's cost of equity from retained earnings and from the sale of new stock.;19. The Longlife Insurance Company has a beta of.8. The average stock currently returns 15% and short-term treasury bills are offering 6%. Estimate Longlife's cost of retained earnings.;20. The Longlife Insurance Company of the preceding problem has several bonds outstanding that are currently selling to yield 9%. What does this imply about the cost of the firm's equity?;21. Hammell Industries has been using 10% as its cost of retained earnings for a number of years. Management has decided to revisit this decision based on recent changes in financial markets. An average stock is currently earning 8%, treasury bills yield 3.5%, and shares of Hammell s stock are selling for $29.44. The firm just paid a dividend of $1.50, and anticipates growing at 5% for the foreseeable future. Hammell s CFO recently asked an investment banker about issuing bonds and was told the market was demanding a 6.5% coupon rate on similar issues. Hammell stock has a beta of 1.4. Recommend a cost of retained earnings for Hammell.

 

Paper#29238 | Written in 18-Jul-2015

Price : $37
SiteLock