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Finance Week 5 Individual Assignment




Question;Week 5 Individual Assignment - Highlighted are the correct answers to each of theproblems. Refer to the word document for each question and tell how you get to the finalanswer. Write out the explanation according to the readings in the word document. Makesure you write down the step by step scenarios for each question of how you got theanswers. Also, any work completed on excel must be embedded within the word file so thatif the professor clicks on it he can see all of the calculations. Please follow theseinstructions carefully as points will be taken off for any little mistake.5.1. Ontario Corporation may raise new capital in one of the following three ways. It hastax rate of 35%. Find the after-tax cost of new capital.(A) It can sell common stock at $27 a share, which will pay a dividend of $2.25 next year.The expected rate of growth of dividends is 5% per annum forever. 13.33%(B) It can sell 8.5% bonds at $850 each, which will mature in 10 years. Assume that thebonds pay interest twice a year and the company pays taxes once a year. Approximately,7.027%, exactly, 7.264%(C) By selling $7 preferred stock at $60 a share, redeemable at par after 5 years. 11.67%5.2. Quebec Company wants to issue discount bonds with a market value equal to 70% oftheir face value. The bonds will carry 4% coupon, paying interest semiannually, and theywill mature after 15 years. The income tax rate of Quebec is 25%.(A) Calculate the approximate yield-to-maturity of the bonds, and then the after-tax cost ofdebt for Quebec. 7.059%, 5.294%(B) Using the concept of original issue discount, write an equation that would give the aftertax cost of debt for Quebec. Solve this equation by using WolframAlpha, Maple, or Excel tofind the after-tax cost of debt for Quebec. 5.529 %5.3. Nova Scotia Company has the following capital structure: 4.5 million shares of stock,selling at $25 each, with = 1.1, zero-coupon bonds with face amount $60 million,maturing in 10 years, with yield to maturity 7.5%, and 500,000 shares of preferred stockselling at $12 per share, paying a dividend of 30 per quarter. The income tax rate of NovaScotia is 33%. The risk-free rate is 4%, and the expected return on the market 13%. Do notuse the original issue discount. Find the weighted average cost of capital for Nova Scotia.11.99%5.4. New Brunswick Corporation has 35% debt and 65% equity (market values) in itscapital structure. The pretax cost of debt is 9%, and that of equity 14%. The total value ofthe company is $225 million and its income tax rate is 30%. New Brunswick has to raise$25 million in new capital, which will make the expected EBIT of the company to be $20million, with a standard deviation of $10 million. The company has decided to raise the newcapital half with debt and half with equity at the existing rates. Calculate New Brunswick'snew WACC, and the probability that its interest coverage ratio will be less than one.11.19%, 11.92%5.5. Manitoba Corporation stockholders expect a growth rate of 5% in the company, and adividend of $2.00 next year. The WACC of Manitoba is 11.5%. There are 4 million shares ofthe common stock, selling at $20 per share. The company also has $70 million face valuezero-coupon bonds, which will be due after 8 years. The bondholders have a required rateof return of 7%. Find the tax rate of Manitoba. 33.896%5.6. British Columbia Co has the following capital structure. It has 12 million shares ofcommon stock selling for $20 each. The stock will pay a dividend of $2 next year and this dividend is expected to grow at the rate of 5% annually. British Columbia has just raised$120 million by selling 10% coupon bonds at par. British Columbia also has 10 millionshares of preferred stock, which pays a dividend of $1.50 annually, and the preferredshareholders have a required rate of return of 12%. British Columbia has 33% income taxrate. Find the WACC of British Columbia. (No answer is given.)5.7. Prince Edward Island Corporation has the following capital structure: $60 million(face value) of 8% bonds, which are selling at 95 and maturing after 10 years, 10 millionshares of common stock selling at $10 each, and one million shares of preferred stockselling at $10 each and paying an annual dividend of $1.25. The of the stock is 1.63whereas the expected return on the market is 12%. The risk-free rate is 4% and thecompany's tax rate is 32%. Find the WACC of Prince Edward Island. (No answer is given)5.8. Saskatchewan Corporation has debt/assets ratio of.3, its cost of debt is 8% and that ofequity 13%. The tax rate of Saskatchewan is 30%. The company is not growing and it has adividend payout ratio of 100%. Its dividend per share is $2. Saskatchewan has 2 millionshares of common stock. Find the total value of Saskatchewan, and its WACC. $43.956million, 10.78%


Paper#48123 | Written in 18-Jul-2015

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