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Question;1.;Crypton;Electronics has a capital structure consisting of 36% common stock and 64%;debt. A debt issue of $1,000 par value, 6.4% bonds that mature in 15 years and;pay annual interest will sell for $975. Common stock of the firm is currently;selling for $30.23 per share and the firm expects to pay a $2.21 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 Crypton's cost of capital;where the firm's tax rate is 30%.;Cryptons;Cost of Capital is ______ %;2.;(weighted average cost of capital) The target capital structure for Jower?s;manufacturing is 46% common stock, 13% preferred stock, and 41% debt. If the;cost of common equity for the firm is 19.7%, the cost of preferred stock is;12.5%, and the before tax cost of debt is 9.8%, what is Jower?s cost of;capital? The firm?s tax rate is 34%. (Round to the nearest three decimal places);Jowers;WACC is ____%;3. 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. Under the assumption that the;firm?s present capital structure reflects the appropriate mix of capital;sources for the firm, You have determined the market value of the firm's;capital structure as follows;Source;of Capital Market Values;Bonds;$3,500,000;Preferred;Stock $2,400,000;Common;Stock $6,300,000;3. To;finance the purchase, Ranch Manufacturing will sell 10-year bonds paying 7.1%;per year at the market price of $1071. Preferred Stock paying $1.94 dividend;can be sold $25.58, Common Stock for Ranch Manufacturing is currently selling;for $54.89 per share. The firm paid a $3.08 dividend last year and expects;dividends to continue growing at a rate of 4.8% per year. The firm's tax rate;is 30 percent. What discount rate should you use to evaluate the equipment;purchase?;Ranch;Manufacturing?s WACC is __% (round to three decimal places);4. Abe;Forrester and three of his friends from college have interested a group of;venure capitalists in backing their busines idea. The proposed operation would;consist of a series of retail outlets to distribute and service a full line ot;vacuum cleaners and accessories. These stores would be located in Dallas;Houston, and San Antonio. To finance the new venture two plans have been;propsed;- Plan;A is an all-common-equity structure which $2.2million dollars would be raised;by selling 86,000 shares of common stock.;2.;-Plan B;would involve issuing $1.2 million dollars in long-term bonds with efective;interest rate of 11.8% plus 1.0 milion would be raised by selling 43,000 shares;of common stock. The debt funds raised under Plan B have no fixed maturity;date, in that this amount of financial leverage is considered a permanent part;of the firms capital sructure.;Abe;and his partners plan to use a 35% 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.;The EBIT;indifference level is associated with the two financing plans is $;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 B is chosen.;5. -;three 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. Initially the corporation will operate in the southern;region of Tennessee, Georgia, north Carolina, and South Carolina. A small group;of private investors in the Atlanta, Georgia area is interested in financing;the startup company and two financing plans have been put forth for;consideration;The;first plan (plan A) is an all-common-equity capital structure. 2.3 million;dollars would be raised by selling common stock at $10 per common share;- Plan;B would involve the use of financial leverage. 1.1 million dollars would be;raised by selling bonds with an effective interest rate of 10.8% (per annum);and the remaining 1.2 million would be raised by selling common stock at the;$10 price per share. The use of financial leverage is considered to be a;permanent part of the firms capitalization, so no fixed maturity date is needed;for the analysis. A 34% tax rate is deemed appropriate for the analysis.;A.;Find the EBIT indifference level associated with the two financial plans. $;- B. A;detailed financial analysis of the firms prospects suggests that the long term;EBIT will be above $318,000 annually. Taking this into consideration, which;plan will generate the higher EPS?

 

Paper#42937 | Written in 18-Jul-2015

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