Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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A firm has determined its optimal capital structure, which is composed of the following sources and target market value proportions.
- Debt: The firm can obtain a 5-year loan from Colorful Bank for $2,500,000, at an annual rate of 10%.
Preferred Stock : The firm has determined it can issue $100 par value preferred stock at $103 per share for a total of $3,500,000. The stock will pay a 10% annual dividend. The cost of issuing and selling the stock is $3 per share.- Common Stock: The firm’s common stock is currently selling for $150 per share. The dividend expected to be paid at the end of the coming year is $15. Its dividend payments have been growing at a constant rate of 5%, total common stock is $4,000,000. Additionally, the firm’s marginal tax rate is 30 percent.
The firm is currently studying the feasibility of investing in a machine worth $6,000,000 which will reduce cash operating costs for $2,600,000 yearly, it will have a 3-year life and will be
- What is the before-tax cost of debt?
- What is the weighted average cost of capital?
- What is the
internal rate of return on its prospective investment?
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- Wool Express (WE) has a capital structure of 30% debt and 70% equity. WE is considering a project that requires an investment of$2.6 million. To finance this project, WE plans to issue 10-year bonds with a coupon interest rate of 12%. Each of these bonds has a $1,000 face value and will be sold to net WE $980. If the current risk-free rate is 7% and the expected market return is 14.5%, what is the weighted cost of capital for WE? Assume WE has a beta of 1.20 and a marginal tax rate of 40%. Group of answer choices 13.4% 14.9% 12.4% 16.0%arrow_forwardof capital. The weighted average cost is to be measured by using the following weights: 35% long-term debt, 20% preferred stock, and 45% common stock equity (retained K earnings, new common stock, or both). The firm's tax rate is 28%. Debt The firm can sell for $1000 a 11-year, $1,000-par-value bond paying annual interest at a 9.00 % coupon rate. A flotation cost of 3% of the par value is required. Preferred stock 7.50% (annual dividend) preferred stock having a par value of $100 can be sold for $98. An additional fee of $5 per share must be paid to the underwriters. Common stock The firm's common stock is currently selling for $80 per share. The stock has paid a dividend that has gradually increased for many years, rising from $2.70 ten years ago to the $4.00 dividend payment, Do, that the company just recently made. If the company wants to issue new new common stock, it will sell them $1.50 below the current market price to attract investors, and the company will pay $2.50 per share…arrow_forwardWest Central plc has been quoted on the London Stock Exchange for 10 years. Analysis of data from the last 10 years suggests that the company has an equity beta of 1.20. The company has 60 % of equity and 40 % of debt. The current market value of West Central plc is $ 100 million. The company is going to undertake a project that has a similar beta to its average assets. The project is expected to be financed entirely by equity. As a result of this financing option and the undertaking of the project, the company will have 70 % of equity and 30 % of debt measured at market values. The risk-free rate is expected to be 5 % per annum and the market is expected to return 10 % per annum. West Central plc pays corporate tax at 40 %. The company's debt is thought to be risk-free. a ) Calculate the company's beta before the proposed project. b) Calculate the company's market value after the proposed project and the financing option. c) Calculate the Net Present Value of the project. d)…arrow_forward
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