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FIN 370 Week 4 My Finance Lab




Question;FIN 370 Week 4 My Finance;Lab;Problem 1(Cost;or Preferred Stock);The preferred stock;of Gator Industries sells for $34.07 and pays $2.76 per year in dividends. What;is the cost of preferred stock financing? If Gator were to issue 549,000 more;preferred shares just like the ones it currently has outstanding. it could sell;them for $34.07 a share but would incur flotation costs of $3.21 per share.;What are the flotation costs for issuing the preferred shares and how should;this cost be incorporated into the NPV of the project being financed? The;firm's cost of preferred stock financing is?;Problem 2(Cost;of debt);The Walgreen;Corporation is contemplating a new investment that it plans to finance using;one-third debt. The firm can sell new $1,000 par value bonds with a 15-year;maturity at a price of $954 that carry a coupon interest rate of 13.8 percent;that is paid semiannually. If the company is in a 34 percent tax bracket, what;is the after-tax cost of capital to Walgreen for the bonds?;Problem 3(Cost;or debt);Gillian Stationery;Corporation needs to raise $600,000 to improve its manufacturing plant. It has;decided to issue a $1,000 par value bond with an annual coupon rate of 8.0;percent with interest paid semiannually and a 10-year maturity. Investors;require a rate of return of 10.0 percent.;a. Compute the;market value of the bonds.;b. How many bonds;will the firm have to issue to receive the needed funds?;c. What is the;firm's after-tax cost of debt if the firm's tax rate is 34 percent?;Problem 4(Weighted;average cost or capital);As a consultant to;GBH Skiwear, you have been asked to compute the appropriate discount rate to;use in the evaluation of the purchase of a new warehouse facility. You have;determined the market value of the firm's current capital structure (which the;firm considers to be its target mix of financing sources) as follows: To;finance the purchase, GBH will sell 20-year bonds with a $1,000 par value;paying 8.5 percent per year (paid semiannually) at the market price of $937. Preferred;stock paying a $2.41 dividend can be sold for $34.46. Common stock for GBH is;currently selling for$50.96 per share. The firm paid a $3.93 dividend last year;and expects dividends to continue growing at a rate of 4.2 percent per year;into the indefinite future. The firm's marginal tax rate is 34 percent. What;discount rate should you use to evaluate the warehouse project?;Problem 5 (Describing;a firm's capital structure);Lowe's Companies;Inc. (LOW) and its subsidiaries operate as a home improvement retailer in the;United States and Canada. As of February 1, 2008, it operated 1,534 stores in;50 states and Canada. The company's balance sheet for February 1, 2008;included the following sources of financing.;a. Calculate the;values of Lowe's debt ratio and interest-bearing debt ratio;b. If the market;value of Lowe's common equity is $35.86 billion and Lowe's has no excess cash.;what is the firms debt-to-enterprise-value ratio? (Hint: you may assume that;the market value of the firm's interest-bearing debt equals its book value.);Problem 6(Computing;interest tax savings);Dharma Supply has;earnings before interest and taxes (EBIT) of $576,000, interest expenses of;$295,000, and faces a corporate tax rate of 34 percent.;a. What is Dharma;Supply's net income?;b. What would;Dharma's net income be if it didn't have any debt (and consequently no interest;expense)?;c. What are the;firm's interest tax savings?;Problem 7(Leverage;and EPS);You have developed;the following pro forma income statement for your corporation.;a. If sales should;increase by 30 percent. by what percent would earnings before interest and;taxes and net income increase?;b. If sales should;decrease by 30 percent, by what percent would earnings before interest and;taxes and net income decrease?;c. If the firm were;to reduce its reliance on debt financing such that interest expense were cut in;half (how would this affect your answers to parts a and b?;Problem 8(EBIT-EPS;break-even analysis);Home Depot Inc. (HD);had 1.70 billion shares of common stock outstanding in 2008, whereas Lowes;Companies,. Inc. (LOW) had 1.46 billion shares outstanding.;Assuming Home;Depot's 2008 interest expense is $696 million Lowes' interest expense is $239 million;and a 36 percent tax rate for both firms, what is their break-even level of;operating income. (i.e the level of EBIT where EPS is the same for both firms)?;Problem 9(Individual;or component costs of capital);Compute the cost of;capital for the firm for the following;a). A bond that has;a $1,000 par value (face value) and a contract or coupon interest rate of;10.5%. Interest payments are $52.50 and are paid semiannually. The bonds have a;current market value of $1,126 and will mature in 10 years. The firm's marginal;tax rate is 34%.;b). A new common;stock issue that paid a $1.84 dividend last year. The firm's dividends are;expected to continue to grow at 6.3% per year forever. The price of the firm's;common stock is now $27.58.;c) A preferred stock;that sells for $148, pays a dividend of 9.5 percent and has a $100 par value;Problem 10;Templeton Extended;Care Facilities, Inc is considering the acquisition of a chain of cemeteries;for $390 million. Since the primary assest of this business is real estate;Templeton's management has determined that they will be able to borrow the;majority of the money needed to buy the business. The current owners have no;debt financing but Templeton plans to borrow $280 million and invest only $110;million in equity in the acquisition. What weights should Templeton use in;computing the WAAC for this acquisition?


Paper#47587 | Written in 18-Jul-2015

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