am. 104. The market value of the company is $60 mil, and it plans to raise and invest $30 mil in new projects. The current capital structure is optimal at $30 mil in debt, and $30 mil incommon stock. New bonds will have an 8% coupon rate, and they will be sold at par value. Its common stock is currently selling at $30 per share, and the stockholders'required return is 12% (consisting of 4% dividend yield with the expected dividend of $1.20 per share, and 8% growth). The stated tax rate is 25%.A. In order to maintain the current capital structure, how much of the new investment must be financed by common stock?B. Assuming there is sufficient cash flow to maintain the target capital structure without issuing any additional share of common stock, calculate the overall cost of capital tothe company, WACC.

WACC is a discounting rate, The WACC is used to calculate today's or current value of a company's…

Answered: The market value of the company is $60…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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AX Co. needs financing a new project. Issue costs would be 3% of market value for a new bond issue, $0.2 per share for ordinary shares, $0.1 per share for preference shares. The ordinary share dividends for next year will be $0.5 and are projected to have an annual growth rate of 5%. What is the weighted cost of capital if the firm finances in the proportions shown in the financing structure table? Market prices are $101 for bonds, $5 for preference shares and $10 for ordinary shares. There will be $25,000 retained profits available. The company tax rate is 30%. Financing structure table for the new project of AX Co. Type of financing Bonds (8%, $100 par, 5-yeare maturity) Percentage of financing 40 Preference shares (4,000 shares outstanding, $0.3 dividend per share) 20 Ordinary equity 40 Total 100
Jades Corp. has decided to undertake a large project. Consequently, there is a need for additional funds. The finance manager plans to issue preferred stock with an annual dividend of P6.50 per share. The stock will have a par value of P50 per share. If investor's required rate of return on this investment is currently 18%, what should be the preferred stock's market value?
A stock sells for a price of $60. Next year's dividend will be $3 per share. If the ROE ("project return") on reinvested funds is 10% and the company has a payout ratio of 40%, what must be the market rate (r)?
Costly Corporation is considering using external equity financing. Currently, the firm's stock is selling for $60.00 per share. The firm just paid dividend $2.0 (D0) and the annual growth rate is 5.0% indefinitely. If the firm issues new stock, the flotation costs would equal 10.0% of the stock's market value. What is the firm's cost of external equity?
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Adams Corporation is considering four averagerisk projects with the following costs and rates of return: ‘The company estimates that it can issue debt at a rate of ry = 10%, and ifs tax rate is 30%. It can issue preferred stock that pays a constant dividend of $5.00 per year at $49.00 per share. Also, ifs common stock currently sells for $36.00 per share; the next expected dividend, Dy, is $3.50; and the dividend is expected to grow at a constant rate of 6% per year. The target capital structure consists of 75% common stock, 15% debt, and 10%preferred stock.a. What is the cost of each of the capital components?b. What is Adams’s WACC?c. Only projects with expected returns that exceed WACC will be accepted. Which projects should Adams accept?
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Mackenzie Company has a price of $37 and will issue a dividend of $2.00 next year. It has a beta of 1.2, the risk-free rate is 5.4%, and the market risk premium is estimated to be 4.8%. a. Estimate the equity cost of capital for Mackenzie. b. Under the CDGM, at what rate do you need to expect Mackenzie's dividends to grow to get the same equity cost of capital as in part (a)? a. Estimate the equity cost of capital for Mackenzie. The equity cost of capital for Mackenzie is %. (Round to two decimal places.) b. Under the CGDM, at what rate do you need to expect Mackenzie's dividends to grow to get the same equity cost of capital as in part (a)? The expected growth rate for dividends is | %. (Round to two decimal places.)

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