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##### Problem Assignment (Capital Structure) - The corporate treasurer of Ajax Company expects the company to grow

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Question;Problem Assignment - Capital Structure;1 The;corporate treasurer of Ajax Company expects the company to grow at 4% in the;future, and debt securities;at 6%;interest (tax rate = 30%) to be a cheaper option to finance the growth. The;current market price per share;of its;common stock is \$39, and the expected dividend in one year is \$1.50 per share.;Calculate the cost of the company's;retained;earnings and check if the treasurer's assumption is correct.;2 The;risk-free rate on 10-year U.S. Treasury bills is 3% and the expected rate of;return on the overall stock market is 11%.;The;company has a beta of 1.6. What is the cost of equity?;3 A;company has a capital structure as follows;Total;Assets \$6,00,000;Debt \$3,00,000;Preferred;Stock \$1,00,000;Common;Equity \$2,00,000;What;would be the minimum expected return from a new capital investment project to;satisfy the suppliers of the capital?;Assume;the applicable tax rate is 40%, interest on debt is 11%, flotation cost per;share of preferred stock is \$0.75, and;flotation cost per share of common stock is;\$4. The preferred and common stocks are selling in the market for \$26 and \$143;a share;respectively, and they are expected to pay a dividend of \$2 and \$7;repectively, in one year. The company's;dividends;are;expected to grow at 13% per year. The firm would like to maintain the existing;capital structure to finance the new;project.;4 Required;rate of return is 10%.;Net;Cash Flow;Year Project A Project;B;0 -\$2,000 -\$2,500;1 \$900 \$1,500;2 \$1,100 \$1,300;3 \$1,300 \$800;a) Calculate;the payback period for each project.;Project;A Project B;b) Calculate;the net present value for each project.;Project;A Project B;c) Which;project do you think will be approved, if only one project can be approved?;Why?;Project;A Project B;d) What if;the required rate of return was 20%?;5 A;corporate bond has a face value of \$1,000 and an annual coupon interest rate of;7%. Interest is paid annually.;10;years of the life of the bond remain. The current market price of the bond is;\$872. To the nearest whole percent;what is;the yield to maturity (YTM) of the bond today?;6 Ajax;Manufacturing dividend is \$8 per share of common stock in one year. The;dividend growth rate is 3%.;Required;rate of return is 14%.;a) What is;the current market price per share?;b) What is;the annual rate of return if you purchase the stock at \$65?;7 A common;stock sells for \$82 per share, has a growth rate of 7% and a dividend that was;just paid of \$3.82. What is the;annual;percent yield per share?;D0;= \$3.82 and therefore D1 = \$3.82 x 1.07 = \$4.09;8 A;corporate bond has a face value of \$1,000 and an annual coupon interest rate of;6%. Interest is paid annually.;12;years of the life of the bond remain. The current market price of the bond is;\$1,027, and it will mature at \$1,100.;To the;nearest whole percent, what is the yield to maturity (YTM) of the bond today?

Paper#37898 | Written in 18-Jul-2015

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