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FIN 500: Case Study 2 Assignment




Question;If;you use Excel to calculate some portions of this assignment (which is fine), be;sure the final report is printable and readable in standard format;(i.e., on an 8.5 x 11 page). Please print out your Excel file (in its exact;form) prior to sending it to be sure it is well organized, formatted properly;and doesn?t print out with multiple blank pages or separated columns.;1.;At;the current time Warren Industries can issue 15-year, $1,000 par-value bonds;paying annual interest at a 12% coupon rate. As a result of current interest;rates, the bonds can be sold for $1,010 each. Flotation costs of $30 per bond;will be incurred in the process (which implies that f = 2.97%, or 0.0297 in;decimal form) and the firm is in a 40% tax bracket.;(a);Find;the net proceeds from the sale of each bond for Warren Industries.;(b);Calculate;the before-tax and the after-tax cost of debt for Warren;Industries.;2.;Drywall;Systems, Inc., is presently in discussions with its investment bankers;regarding the issuance of new bonds. The investment banker has informed the;company that different maturities will carry different coupon rates and sell at;different prices. Drywall Systems must choose among several alternatives. In;each case, the bonds will have a $1,000 par value and flotation costs will be;$30 per bond. This implies that the firm will net $970 per bond, before;the adjustment for the premium (+) or discount (-). The company is taxed at a;rate of 40%. Calculate the after-tax costs of financing with each of the;following alternatives.;Alternative;Coupon Rate;Time to Maturity;Premium (+) or Discount (-);A;9%;16 years;+ $250;B;7%;5 years;+ $50;C;6%;7 years;Par;D;5%;10 years;- $75;3. Gem;Systems has recently issued preferred stock. The stock has a 12% annual;dividend based on a par value of $100 per share. The stock is currently selling;for $97.50 per share in the secondary market (so that Po = $97.50). Finally;flotation costs of $2.50 must be paid for each new share Gem Systems issues.;(a) Calculate;the cost of preferred stock based on the outstanding issue, given the current;market price.;(b) If;Gem Systems sells a new issue of preferred stock carrying a par value of $100;but with an annual dividend of 10% of par, what is the cost of this newly;issued preferred stock if the firm nets $90.00 per share after flotation costs?;4. Calculate;the cost of preferred stock (rPS) for each of the following;Preferred Stock;Par Value;Current Price (Po);Flotation Cost;Annual Dividend;(% of Par);A;$100;$101;$9.00;11%;B;$40;$38;$3.50;8%;C;$35;$37;$4.00;$5.00;D;$30;$26;5% of par;$3.00;E;$20;$20;$2.50;9%;5. JPM;Corporation common stock has a beta of 1.2. The risk-free rate is 6%, and the;market return is 11%.;(a) Derive;the risk premium on JPM common stock.;(b) Determine;JPM?s cost of common equity using the CAPM.;6. Reynolds;Textiles wants to measure its cost of common equity. The firm?s stock is;currently selling for $57.50 per share. The firm expects to pay a $3.40;dividend at the end of 2011 (so assume that;D1 = $3.40 for purposes;of calculation). The dividends for the last 5 years are as follows;Year Dividend;2010 $3.10;2009 $2.92;2008 $2.60;2007 $2.30;2006 $2.12;After;incurring flotation costs, Reynolds Textiles expects to net $52 per share on a;new issue.;(a) Determine;the growth rate of dividends (g).;(b) By;applying the constant-growth valuation model, determine the cost of retained;earnings common equity (rs).;(c) By;applying the constant-growth valuation model, determine the cost of;newly-issued common equity (re).;7. Brite;Lighting Corporation wants to investigate the effect on its cost of capital;based on the rate at which the company is taxed. The firm wishes to maintain a;capital structure of 30% debt, 10% preferred stock, and 60% common stock. The;cost of financing with retained earnings is 14% (i.e., rs = 14%);the cost of preferred stock financing is 9% (rps = 9%), and the before-tax;cost of debt is 11% (rd = 11%). Calculate the weighted average cost;of capital (WACC) given the tax rate assumptions in parts (a) to (c) below.;(a) Tax;rate = 40%.;(b) Tax;rate = 35%.;(c) Tax;rate = 25%.;8. Westerly;Manufacturing has compiled the information shown in the following table;Source of Capital;Book Value;Market Value;After-tax Cost;Long-Term Debt;$4,000,000;$3,840,000;6.0%;Preferred Stock;$40,000;$60,000;13.0%;Common Stock Equity;$1,060,000;$3,000,000;17.0%;Totals;$5,100,000;$6,900,000;(a) Calculate;the firm?s weighted average cost of capital (WACC) using book value weights.;(b) Calculate;the firm?s weighted average cost of capital (WACC) using market value weights.;(c) Compare;your answers found in parts (a) and (b) and briefly explain the differences. Other;things equal, would you recommend that Westerly Manufacturing rely on its book;value weights or market value weights in determining its WACC?;9.;To help finance a major expansion, Delano Development;Company sold a noncallable bond several years ago that now has 15 years to;maturity. This bond has a 10.25% annual coupon, paid semiannually, it sells;at a price of $1,025, and it has a par value of $1,000. If Delano?s tax rate;is 40%, what component cost of debt should be used in the WACC calculation?;10.;Roxie Epoxy?s balance sheet shows a total of $50;million long-term debt with a coupon rate of 8.00% and a yield to maturity of;7.00%. This debt currently has a market value of $55 million. The balance;sheet also shows that that the company has 20 million shares of common stock;and the book value of the common equity (common stock plus retained earnings);is $65 million. The current stock price is $8.25 per share, stockholders;required return, rs, is 10.00%, and the firm's tax rate is 40%. Based;on market value weights, and assuming the firm is currently at its target;capital structure, what WACC should Roxie use to evaluate capital budgeting;projects?;11.;Bruner Breakfast Foods? (BBF) balance sheet shows a;total of $20 million long-term debt with a coupon rate of 8.00% (assume each;bond to have a maturity value, M, of $1,000). The yield to maturity on this;debt is 10.00%, and the debt has a total current market value of $18 million.;The balance sheet also shows that that the company has 10 million shares of;stock, and total of common equity (common stock plus retained earnings) is;$30 million. The current stock price is $4.50 per share, and stockholders;required rate of return, rs, is 12.25%. The company recently;decided that its target capital structure should have 50% debt, with the;balance being common equity. The tax rate is 40%. Calculate WACCs based on target;book, and market value capital structures (Note: I am asking;for three (3) separate WACC values here).


Paper#51262 | Written in 18-Jul-2015

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