4) Delta Corporation's weighted average cost of capital is to be measured by using thefollowing weights– 40% long-term debt, 10% preferred stock, 40% common stock and10% retained earnings. The company is subject to 40% tax rate.Debt – The firm can sell for $980 a 10 years, $1000 par value bond paying annualinterest at a 10% coupon rate. An issue cost of 3% of the par value would be required inaddition to the discount of $20 per bond.Preferred Stock – 8% preferred stock having a par value of $100 can be sold for $65. Anadditional fee of $2 per share must be paid to the underwriters.Common Stock – It is selling for $50 per share. The current (1994) dividend is $3.75 pershare. The following table shows the dividend pattern of the company -YearDividend ($)19943.7519933.519923.3019913.1519902.85New common stock must be underpriced $5 per share & the issue cost is $3 per share.Retained Earnings - The company has $10,000 retained earnings which will be used tofinance the capital. Company is using both common stock and retained earnings.Calculate the cost of debt, preferred stock, common stock, retained earnings andWeighted Average Cost of Capital for Delta Corporations.

Answered: 4) Delta Corporation's weighted average…

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

Problem 1PS

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The cost of debt for firm XYZ is 6%. It's tax rate is 40%. The cost of retained earnings is 12% and the cost of external common equity is 14%. Retained earnings is $5000. The target capital structure calls for 45% debt and 55% equity. Compute the following:A. Retained earnings break point B. WACC below the RE break pointC. WACC above the RE break point
Bartlett Company's target capital structure is 40% debt, 15% preferred, and 45% common equity. The after-tax cost of debt is 6.00%, the cost of preferred is 7.50%, and the cost of common using reinvested earnings is 12.75%. The firm will not be issuing any new stock. You were hired as a consultant to help determine their cost of capital. What is its WACC? a. 9.26% b. 9.83% c. 10.12% d. 9.54% e. 8.98%
Crowley Company has a capital structure with 30% debt at a 9% interest rate. Its beta is 1.3, the risk-free rate is 1.5%, and the market risk premium is 8%. The company has no preferred stock. Its combined federal-plus-state tax rate is 25%. a. Calculate the company's cost of equity b. Calculate the company's weighted average cost of capital c. Calculate he the company’s unlevered cost of equity
(Individual or component costs of capital) Compute the cost of capital for the firm for the following: a. A bond that has a $1,000 par value (face value) and a contract or coupon interest rate of 10.5 percent. Interest payments are $52.50 and are paid semiannually. The bonds have a current market value of $1,121 and will mature in 10 years. The firm's marginal tax rate is 34 percet. b. A new common stock issue that paid a $1.84 dividend last year. The firm's dividends are expected to continue to grow at 6.4 percent per year, forever. The price of the firm's common stock is now $27.92. c. A preferred stock that sells for $134, pays a dividend of 9.1 percent, and has a $100 par value. d. A bond selling to yield 11.7 percent where the firm's tax rate is 34 percent. a. The after-tax cost of debt is %. (Round to two decimal places.)
K SIROM Scientific Solutions has $10 million of outstanding equity and $5 million of bank debt. The bank debt costs 5% per year. The estimated equity beta is 2. If the market risk premium is 8% and the risk-free rate is 5%, compute the weighted average cost of capital if the firm's tax rate is 30%. OA. 15.17% OB. 17.44% O C. 15.93% OD. 16.68% ...
The Corp. is expected to pay $1.85 dividend a year and the dividend is expected to grow at a constant rate of 4.5% a year and the common stock currently sells for $35 a share before tax cost the debt is 5.5% and the tax rate is 40% the target capital structure consist of 40% debt and 60% common equity what is the companies WACC?
K SIROM Scientific Solutions has $4 million of outstanding equity and $12 million of bank debt. The bank debt costs 5% per year. The estimated equity beta is 1. If the market risk premium is 9% and the risk - free rate is 4%, compute the weighted average cost of capital if the firm's tax rate is 25%. OA. 6.71% OB. 5.8% C. 5.49% D. 6.1%
Juni Corporation has a target capital structure that consists of 40% debt and 60% equity. Juni can borrow at an interest rate of 10%. Also, Juni has determined its cost of equity to be 14%. Juni’s tax rate is 40%. Calculate Juni’s weighted average cost of capital.
1. Bradshaw Steel has a capital structure with 30 percent debt (all long-term bonds) and 70 percent common equity. The yield to maturity on the company’s long-term bonds is 8 percent, and the firm estimates that its overall composite WACC is 10 percent. The risk-free rate of interest is 5.5 percent, the market risk premium is 5 percent, and the company’s tax rate is 40 percent. Bradshaw uses the CAPM to determine its cost of equity. What is the beta on Bradshaw’s stock? 1.48 1.35 1.31 1.07 0.10 2. Calculate the market price today of a P1,000 bond which has 10 years until maturity and pays quarterly interest at an annual coupon rate of 12 percent. The required return on similar risk bonds is 20 percent. P845.66 P835.45 P2,201.08 P656.82 3. What happens to the annual price of a four-year, P1,000 bond with an 8% annual coupon when interest rates change from 8% to 6%? A price increase of P69.30. A price increase of P57.07. A price decrease of P57.09. No…
The cost of debt for firm XYZ is 6%. It's tax rate is 40%. The cost of retained earnings is 12% and the cost of external common equity is 14%. Retained earnings is $5000. The target capital structure calls for 45% debt and 55% equity. The firm has 3 projects available: One with a cost of $4000 and an IRR of 18%; one with a cost of $3000 and an IRR of 20%; and one with a cost of $6000 and an IRR of 6%. Do the following: Compute the optimal capital budget. In other words, how much capital must the firm raise in order to invest in all projects whose IRR exceeds the WACC? What projects should be expected?

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