Lingenburger Cheese Corporation has 6.6 million shares of common stock outstanding, 235,000 shares of 3.9 percent preferred stock outstanding, par value of $100; and 120,000 bonds with a semiannual coupon rate of 5.6 percent outstanding, par value $1,000 each. The common stock currently sells for $70 per share and has a beta of 1.10, the preferred stock has a par value of $100 and currently sells for $86 per share, and the bonds have 15 years to maturity and sell for 104 percent of par. The market risk premium is 7.4 percent, T-bills are yielding 3.4 percent, and the company's tax rate is 21 percent. a. What are the firm's market value capital structure weights? Note: Do not round intermediate calculations and round your answers to 4 decimal places, e.g., .1616. b. If the company is evaluating a new investment project that has the same risk as the firm's typical project, what rate should the firm use to discount the project's cash flows? Note: Do not round intermediate calculations enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. a. Debt Preferred stock Equity 0.0333 b. Discount rate 9.84 %

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
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Lingenburger Cheese Corporation has 6.6 million shares of common stock outstanding, 235,000 shares of 3.9 percent preferred stock
outstanding, par value of $100; and 120,000 bonds with a semiannual coupon rate of 5.6 percent outstanding, par value $1,000 each.
The common stock currently sells for $70 per share and has a beta of 1.10, the preferred stock has a par value of $100 and currently
sells for $86 per share, and the bonds have 15 years to maturity and sell for 104 percent of par. The market risk premium is 7.4 percent,
T-bills are yielding 3.4 percent, and the company's tax rate is 21 percent.
a. What are the firm's market value capital structure weights?
Note: Do not round intermediate calculations and round your answers to 4 decimal places, e.g., .1616.
b. If the company is evaluating a new investment project that has the same risk as the firm's typical project, what rate should the firm
use to discount the project's cash flows?
Note: Do not round intermediate calculations enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.
a. Debt
Preferred stock
Equity
0.0333
b. Discount rate
9.84 %
ง
Transcribed Image Text:es Lingenburger Cheese Corporation has 6.6 million shares of common stock outstanding, 235,000 shares of 3.9 percent preferred stock outstanding, par value of $100; and 120,000 bonds with a semiannual coupon rate of 5.6 percent outstanding, par value $1,000 each. The common stock currently sells for $70 per share and has a beta of 1.10, the preferred stock has a par value of $100 and currently sells for $86 per share, and the bonds have 15 years to maturity and sell for 104 percent of par. The market risk premium is 7.4 percent, T-bills are yielding 3.4 percent, and the company's tax rate is 21 percent. a. What are the firm's market value capital structure weights? Note: Do not round intermediate calculations and round your answers to 4 decimal places, e.g., .1616. b. If the company is evaluating a new investment project that has the same risk as the firm's typical project, what rate should the firm use to discount the project's cash flows? Note: Do not round intermediate calculations enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. a. Debt Preferred stock Equity 0.0333 b. Discount rate 9.84 % ง
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