EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN: 9781337514835
Author: MOYER
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Chapter 12, Problem 15P
a)
Summary Introduction
To determine: The marginal cost of capital schedule.
b)
Summary Introduction
To determine: The optimal capital budget.
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The financial manager of Sarap Corporation wants to determine the amount of cash outlays to be spent for the next period. He asked the help of the accountant and the latter provided a cash budget for the next year. According to the computations, the company would be incurring cash expenses of P6,612,500 per month. The financial manager has estimated a cost of P40 per transaction in case non-cash asset is converted to cash. The firm's opportunity cost ratio is 12%.
a. The optimum cash balance is?
Tong Foong Co. Ltd. has decided that its capital budget during the coming year will be $20 million. Its optimal capital structure is 60 percent equity and 40 percent debt. Its earnings before interest and taxes (EBIT) are projected to be $34.667 million for the year. The company has $200 million of assets; its average interest rate on outstanding debt is 10 percent; and its tax rate is 40 percent.
Required:
How much debt is outstanding (in dollars) and what is the cost of the debt (in dollars) for the period?
Compute the Earnings After Tax (Net Income)?
How much equity is required for the coming year capital budget?
If the company follows the residual dividend policy and maintains the same capital structure, what will its dividend payout (in $) and the dividend payout ratio (in %)?
Plug N’ Play Inc. is considering financing a project as part of its regular capital budgeting process. The company wants to reevaluate its cost of capital for the upcoming projects. The company uses all the three components of capital for raising its fund; debt, preferred and common equity maintaining a target capital structure of 30%, 20%, and 50%. The company’s corporate tax is40%. Based on the above information, answer the following questions:a. If the company would be able to issue new 20-year debt with a cost of 10%, what is the after-tax component cost of the new debt?b. It can issue perpetual preferred stock at a price of $40 a share. The issue is expected to pay a constant annual dividend of $5.00 a share. The floatation cost on the issue is estimated to be 5 percent. What is the component cost of the new preferred stock?
Chapter 12 Solutions
EBK CONTEMPORARY FINANCIAL MANAGEMENT
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