(Weighted average cost of capital) As a member of the Finance Department of Ranch Manufacturing, your supervisorhas asked you to compute the appropriate discount rate to use when evaluating the purchase of new packagingequipment for the plant. Under the assumption that the firm's present capital structure reflects the appropriate mix ofcapital sources for the firm, you have determined the market value of the firm's capital structure as follows:To finance the purchase, Ranch Manufacturing will sell 10-year bonds paying interest at a rate of 6.9 percent peryear (with semiannual payment) at the market price of $1,046. Preferred stock paying a $1.97 dividend can be sold for$24.17. Common stock for Ranch Manufacturing is currently selling for $54.79 per share and the firm paid a $2.93dividend last year. Dividends are expected to continue growing at a rate of 5.4 percent per year into the indefinite future.If the firm's tax rate is 30 percent, what discount rate should you use to evaluate the equipment purchase?a. Calculate component weights of capital.The weight of debt in the firm's capital structure is %. (Round to two decimal places.)Data tableSource of CapitalBondsMarket Values$4,200,000$2,200,000Preferred stockCommon stock$6,400,000(Click on the icon in order to copy its contents into a spreadsheet.)X

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Description: (Weighted average cost of capital) As a member of the Finance Department of Ranch Manufacturing, your supervisorhas asked you to compute the appropriate discount rate to use when evaluating the purchase of new packagingequipment for the plant. Under

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a. Calculate component weights of capital. The weight of debt in the firm's capital structure is%. (Round to two decimal places.) Data table Source of Capital Bonds Market Values $4,200,000 Preferred stock $2,200,000 Common stock $6,400,000 (Click on the icon in order to copy its contents into a spreadsheet.) X

a. Calculate component weights of capital. The weight of debt in the firm's capital structure is%. (Round to two decimal places.) Data table Source of Capital Bonds Market Values $4,200,000 Preferred stock $2,200,000 Common stock $6,400,000 (Click on the icon in order to copy its contents into a spreadsheet.) X

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter19: Lease And Intermediate-term Financing

Section: Chapter Questions

Problem 8P

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(Weighted average cost of capital) As a member of the Finance Department of Ranch Manufacturing, your supervisor has asked you to compute the appropriate discount rate to use when evaluating the purchase of new packaging equipment for the plant. Under the assumption that the firm's present capital structure reflects the appropriate mix of capital sources for the firm, you have determined the market value of the firm's capital structure as follows: To finance the purchase, Ranch Manufacturing will sell 10-year bonds paying interest at a rate of 7.1 percent per year (with semiannual payment) at the market price of $1,039. Preferred stock paying a $2.09 dividend can be sold for $24.18. Common stock for Ranch Manufacturing is currently selling for $55.92 per share and the firm paid a $2.96 dividend last year. Dividends are expected to continue growing at a rate of 4.9 percent per year into the indefinite future. If the firm's tax rate is 30 percent, what discount rate should you use to…
To assist with evaluating potential capital projects, Carrium Insights Inc. is seeking to determine its actual Weighted Average Cost of Capital (WACC). Utilising information from the financial statements, together with current information, the Finance Manager has compiled the following information as it pertains to the company’s capital structure: Debt: Bonds outstanding has a face value of $568,000,currently selling at 95% of par. These bonds have 20 years left to maturityandacoupon rate of 7.55%.(Hint: you can use the lowest multiple of $1,000 for the YTM calculation only) Common stock: 21,000 shares of common stock outstanding with a market price of $63.00.The company just paida dividend of $6.00; for ease of computation, dividends are expected to grow by 5% annually. Preferred stock:The company intends to offer 15,000 shares of preferred stock to the public at a price of $25.00 per share. The intention is to pay an annual dividend of $3.00. Additional Information: ✓The Company’s…
3) As a consultant to KLM Snow Sports Equipment, you have been asked to compute the appropriate discount rate to use to evaluate the purchase of anew warehouse facility. You have determined the market value of the firm's capital structure as follows:Source of Capital Market ValueBonds $600,000Preferred Stock $150,000Common Stock $450,000To finance the purchase, KLM will sell 20‐year bonds, with a 9% coupon rate and semiannual coupons, at the market price of $940. Flotation costs forissuing the bonds are 3 percent of the market price. Preferred stock paying an annual $3 dividend can be sold for $42; the cost of issuing these shares is$3 per share. Common stock for KLM is currently selling for $54 per share. The firm paid a $2.80 dividend last year and expects dividends to continuegrowing at a rate of 5 percent per year. Flotation costs for issuing new common stock will be 6 percent of the market price. The firm’s dividendscurrently equal the net income so there is no internal equity…
To assist with evaluating potential capital projects, Insignia Corporation Limited is seeking to determine its Weighted Average Cost of Capital. Utilising information from the financial statements, the company has the following capital structure: Debt: Bonds outstanding has a face value of $835,000,000, currently selling at 105% of par. The coupon rate on these bonds is 9% and there is 10 years left to maturity. (Hint: you can use the lowest multiple of $1,000 for the YTM calculation only) Common stock: 13,000,000 shares of common stock outstanding with a market price of $60.00. The company has no preference shares outstanding. Additional Information: The Company’s tax rate is 30%. The current risk free rate is 3.50%; market return is 8%. The Company’s beta is 2.50. Required: Calculate the Weighted Average Cost of Capital for Insignia Corporation Limited.
1. On July 1, Coastal Distribution Company is considering leasing a building and buying the necessary equipment to operate a public warehouse. Alternatively, the company could use the funds to invest in $740,000 of 4.5% U.S. Treasury bonds that mature in 14 years. The bonds could be purchased at face value. The following data have been assembled:
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Dynamic World Vista Industries (DWVI) wishes to estimate its cost of capital for use in analyzing projects that are similar to those that already exist. The firm's current capital structure, in terms of market value, includes 30 percent corporate bond, 10 percent irredeemable loan notes, 10 percent preference shares and 50 percent ordinary shares. The firm's corporate bond has an average yield to maturity of 8.3 percent. DWVI also has an irredeemable loan notes currently trading at GHc 40 ex interest an interest rate of five (5) percent. Its preference shares have a Gllc 70 par value, an 8 percent dividend, and are currently selling for GHc 76 per share. DWVI's beta is 1.05, return on riskless asset is 4 percent and the return on the GSE (the market proxy) is 11.4 percent. The industry is in the 40 percent marginal tax bracket. Required: a) What are DWVI's pre-tax costs…
CrochetCo is considering an investment in a project which would require an initial outlay of $301,072 and produce expected cash flows in years 1 through 4 of $85,410 per year. You have determined that the current after-tax cost of the firm's capital (required rate of return) for each source of financing is as follows: Source of Capital Cost Long-Term Debt 4% Preferred Stock 8% Common Stock 13% Weight 45% 11% remaining What is the net present value of this project?
Dynamic World Vista Industries (DWVI) wishes to estimate its cost of capital for use in analyzing projects that are similar to those that already exist. The firm’s current capital structure, in terms of market value, includes 30 percent corporate bond, 10 percent irredeemable loan notes, 10 percent preference shares and 50 percent ordinary shares. The firm’s corporate bond has an average yield to maturity of 8.3 percent. DWVI also has an irredeemable loan notes currently trading at GHc 40 ex interest an interest rate of five (5) percent. Its preference shares have a Gllc 70 par value, an 8 percent dividend, and are currently selling for GHc 76 per share. DWVI's beta is 1.05, return on riskless asset is 4 percent and the return on the GSE (the market proxy) is 11.4 percent. The industry is in the 40 percent marginal tax bracket. Required: a) What are DWVI's pre-tax costs of debts,…
Shaylee Corporation has $2.00 million to invest in new projects. The company's managers have presented a number of possible options that the board must prioritize. Information about the projects follows: Initial investment Present value of future cash flows Required: 1. Is Shaylee able to invest in all of these projects simultaneously? 2-a. Calculate the profitability index for each project. 2-b. What is Shaylee's order of preference based on the profitability index? Complete this question by entering your answers in the tabs below. Req 1 Project A $ 435,000 785,000 Req 2A and 2B Is Shaylee able to invest in all of these projects simultaneously? Is Shaylee able to invest in all of these projects simultaneously? Project C $ 740,000 1,220,000 Project D $ 965,000 1,580,000
You are a financial analyst for the Hittle Company. The director of capital budgeting has asked you to analyze six proposed capital investments. Each project has a cost of $1,000, and the required rate of return for each is 12%, determine for each project (a) the payback period, (b) the net present value, (c) the profitability index, and (d) the internal rate of return. Assume under MACRS the asset falls in the three-year property class and that the corporate tax rate is 25 percent. You are limited to a maximum expenditure of $3000 only for this capital budgeting period. Which projects you will accept and why? Justify your suggestions Project A Project B Project C Project D Project E Project F Investment -1000 -1000 -1000 -1000 -1000 -1000 1 150 200 250 800 900 1000 2 350 300 250 350 300 200 3 400 500 600 200 150 100 4 700 650 600 200 150 50 12 Capital Budgeting and Estimating Cash Flows Table 12.2 PROPERTY CLASS RECOVERY YEAR MACRS depreciation percentages 3-YEAR 5-YEAR 7-YEAR 10-YEAR…