Part II: Problem solving (30 points):A firm has determined its optimal capital structure, which is composed of the following sources andtarget market value proportions:Source of CapitalLong-term debtPreferred stockCommon stock equityTarget MarketProportions30%565Debt: The firm can sell a 20-year, $1,000 par value, 9 percent bond for $980. A flotation cost of 2 percentof the face value would be required.Preferred Stock: The firm has determined it can issue preferred stock at $65 per share par value. Thestock will pay an $8.00 annual dividend. The cost of issuing and selling the stock is $3 per share.Common Stock: The firm's common stock is currently selling for $40 per share. The dividend expectedto be paid at the end of the coming year is $5.07. Its dividend payments have been growing at a constantrate for the last five years. Five years ago, the dividend was $3.45. It is expected that to sell, a new commonstock issue must be underpriced at $1 per share and the firm must pay $1 per share in flotation costs.Additionally, the firm's marginal tax rate is 40 percent.Calculate the firm's weighted average cost of capital assuming the firm has exhausted all retainedearnings.

To calculate the firm's weighted average cost of capital (WACC), we need to determine the cost of…

Answered: A firm has determined its optimal…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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You are considering purchasing a share of preferred stock with the following characteristics: par value = $100 dividend rate = 12% per year payment schedule = quarterly maturity date = required rate of return = 6% per year current market price = $135 per share Based on this information, answer the following: A. What is the dollar amount of the quarterly dividend on this stock? B. Using the Discounted Cash Flow Method, what is the dollar value of this stock? C. Using the Discounted Cash Flow Method, what is the annual expected return for this stock? D. Based on your answer to part B, should you invest in the stock? Why or why not? E.…
A firm has equity with market value $100 million and debt with market value at $70 million. The debt pays perpetual expected coupons of $3.5 million annually. The above numbers are prior to a stock buyback being announced. The firm uses some of its cash buyback stock on of $20 million. As a result of the fall in its cash, the expected coupon payment to debt reduce to $3.4 million (expected payments is the probability weighted future coupons, and the probability that in some future states of the world the firm would default has increased due to the the stock buyback). Also the rate of discount Rd for expected coupons paid to debt rises to 5.35%. Assume Modigliani-Miller is true (which also means there are no taxes). What will be the value of Equity after the stock buyback? (Do not include the $20 million that is paid to the Equity holders.)
An investor with a required return of 15 percent for very risky investments in common stock has analyzed three firms and must decide which, if any, to purchase. The information is as follows: Firm A B C Current earnings $ 1.60 $ 3.20 $ 6.80 Current dividend $ 2.10 $ 2.50 $ 6.40 Expected annual growth rate in 5 % 2 % -3 % dividends and earnings Current market price $ 24 $ 23 $ 41 What is the maximum price that the investor should pay for each stock based on the dividend-growth model? Round your answers to the nearest cent. Stock A: $ Stock B: $ Stock C: $ If the investor does buy stock A, what is the implied percentage return? Round your answer to two decimal places. % If the appropriate P/E ratio is 17, what is the maximum price the investor should pay for each stock? Round your answers to the nearest cent. Stock A: $ Stock B: $ Stock C: $ If the appropriate P/E ratio is 5, what is the maximum…
FIXY has assets of $2 million invested in a 25-year, 6 percent annual coupon Treasury bond selling at par. The assets are financed with equity and a $ 1700000, 4-year, 3 percent annual coupon capital note selling at par. What is the leverage adjusted duration gap of FIXY? What is the impact on equity value if the relative change in all market interest rates is AR/(1+R /2)=0.003?
Consider the case of Kuhn Co. Kuhn Co. is considering a new project that will require an initial investment of $20 million. It has a target capital structure of 35% debt, 2% preferred stock, and 63% common equity. Kuhn has noncallable bonds outstanding that mature in 15 years with a face value of $1,000, an annual coupon rate of 11%, and a market price of $1555.38. The yield on the company's current bonds is a good approximation of the yield on any new bonds that it. issues. The company can sell shares of preferred stock that pay an annual dividend of $8 at a price of $95.70 per share. Kuhn does not have any retained earnings available to finance this project, so the firm will have to issue new common stock to help fund it. Its common stock is currently selling for $33.35 per share, and it is expected to pay a dividend of $2.78 at the end of next year. Flotation costs will represent 3% of the funds raised by issuing new common stock. The company is projected to grow at a constant rate…
Consider the case of Kuhn Co. Kuhn Co. is considering a new project that will require an initial investment of $20 million. It has a target capital structure of 58% debt, 6% preferred stock, and 36% common equity. Kuhn has noncallable bonds outstanding that mature in 15 years with a face value of $1,000, an annual coupon rate of 11%, and a market price of $1555.38. The yield on the company's current bonds is a good approximation of the yield on any new bonds that it issues. The company can sell-shares of preferred stock that pay an annual dividend of $8 at a price of $95.70 per share. Kuhn does not have any retained earnings available to finance this project, so the firm will have to issue new common stock to help fund it. Its common stock is currently selling for $33.35 per share, and it is expected to pay a dividend of $2.78 at the end of next year. Flotation costs will represent 3% of the funds raised by issuing new common stock. The company is projected to grow at a constant rate…
An all-equity-financed firm plans to grow at an annual rate of at least 25%. Its return on equity is 39%. What is the maximum possible dividend payout rate the firm can maintain without resorting to additional equity issues?
Firm currently pays a dividend of 4 EURO per share. That dividend is expected to grow at a 5 % rate indefinitely. Stocks with similar risk provide a 10 % expected return. Estimate the intrinsic value of the firm’s stock based on the assumption that the stock will be sold after 2 years from now at its expected intrinsic value. Question 10 The categories of stocks most widely used in the selection process and relevant in the formation and management of the stock portfolios. are: blue chip stocks; income stocks; cyclical stocks; defensive stocks; growth stocks; speculative stocks; penny stocks. Explain each category

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