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Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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
Transcribed Image Text:A
F
1
General Information
Tax Rate
25%
Available Retained Earnings $150,000
4
Bonds
Settlement Date
6/30/2021
7 Maturity Date
Coupon Rate
9 Frequency
6/30/2051
8.
7.0%
$ 1,000
$ 1,000
10 Face Value
11 Price
12 Flotation Costs
2.00%
13 Yield to Maturity
14 After-tax Cost of Debt
Use Yield function w/ (-)Net Proceeds in Place of Price
15
16
Preferred Equity
17 Dividend
6
18 Face Value
50
19 Price
75
20 Flotation Costs
4.00%
21 Cost of Preferred Equity
Use Perpetuity Model for Prefereed w/ Net Proceeds in Place of Price)
22
23
Common Equity
24 Dividend (Di)
1.65
25 Growth Rate
6%
26 Price
$ 35.00
27 Flotation Costs
8%
28 Beta
1.25
29 Risk-free Rate
3%
30 Market Risk Premium
6%
31 Cost of Retained Earnings
32 Cost of New Common Equity
Hint: Use CAPM
Hint: Use DDM with Net Proceeds
33
Source
Market Value BV Weights MV Weights
Quantity
1,250,000 $ 25,000,000
100,000 S 5,000,000
8,600 $ 8,600,000 S
34
Book Value
35
Common
64.77%
36 Preferred
37 Debt
8,600,000
38 Totals
$ 38,600,000 $
8,600,000
64.77%
0.00%
39
Weighted Average Cost of Capital
Book Value Weights
With Retained Earnings
With New Common Equity
44 Market Value Weights
With Retained Earnings
With New Common Equity
40
41
42
43
45
46

Transcribed Image Text:TRM Consulting Services currently has the following capital structure:
Source
Book Value
Quantity
Common Stock
$ 25,000,000
1,250,000
Preferred Stock
5,000,000
100,000
8,600
Debt
8,600,000
New debt would mature on June 30, 2051, have a coupon rate of 7%, and would
be sold for their par value of $1,000. The bonds pay interest semiannually, and
flotation costs would be 2% of the selling price. The bonds would be issued on
June 30, 2021.
The preferred stock pays a $6 dividend each year and is currently valued at $75
per share. Flotation costs on preferred would be 4% of the price.
The common stock, which can be bought for $35, has experienced a 6% annual
growth rate in dividends and is expected to pay a $1.65 dividend next year. Flota-
tion costs on new common cquity would be 8%. The stock has a beta of 1.25, the
risk-free rate is 3%, and the expected market risk premium is 6%.
In addition, the firm expects to generate $150,000 of retained earnings. Assume
that TRM's marginal tax rate is 25%.
a. Set up a worksheet with all of the data from the problem in a well-organized
input area.
b. Calculate the book-value weights for each source of capital.
c. Calculate the market-value weights for each source of capital.
d. Calculate the component costs of capital (i.e., debt, preferred equity, retained
earnings, and new common equity). Use the YIELD function (see page 311)
when finding the after-tax cost of debt. Use the CAPM to find the cost of
retained earnings, and the constant growth model for new common equity.
Calculate the weighted average costs of capital using both the market-value
and book-value weights with retained earnings and also new common equity.
e.
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