Northwest Utility Company faces increasing needs for capital. Fortunately, it has an Aa3 credit rating. The corporate tax rate is 40percent. Northwest's treasurer is trying to determine the corporation's current weighted average cost of capital in order to assess theprofitability of capital budgeting projects.Historically, the corporation's earnings and dividends per share have increased about 9.4 percent annually and this should continue inthe future. Northwest's common stock is selling at $76 per share, and the company will pay a $9.60 per share dividend (D₁)The company's $120 preferred stock has been yielding 9 percent in the current market. Flotation costs for the company have beenestimated by its investment banker to be $4.00 for preferred stock.The company's optimum capital structure is 40 percent debt, 20 percent preferred stock, and 40 percent common equity in the formof retained earnings. Refer to the following table on bond issues for comparative yields on bonds of equal risk to Northwest.IssueUtilities:Pacific Electric Power -7 1/4 2033Southwest Bell-7 3/8 2035Data on Bond IssuesVirginia Power & Light-8 1/2 2032Industrials:Issac & Johnson-6 3/4 2033Wholesale Department Stores-7 1/8 2033Hotel Corporation-10 2035Cost of debtCost of preferred stock%Moody'sRatingAa2Aa3A2%AaaA282Price$ 955.18903.25985.66830.24980.921,095.10a. Compute the cost of debt, Ka.Note: Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.Yield toMaturity8.66%8.338.66b. Compute the cost of preferred stock, Kp.Note: Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.c. Compute the cost of common equity in the form of retained earnings, K8.34%8.909.66

Name: Northwest Utility Company faces increasing needs for capital. Fortuna
Uploaded: 2024-03-20T06:33:21.000Z
Channel: Bartleby
Description: Northwest Utility Company faces increasing needs for capital. Fortunately, it has an Aa3 credit rating. The corporate tax rate is 40percent. Northwest's treasurer is trying to determine the corporation's current weighted average cost of capital in o

Business

Finance

a. Compute the cost of debt, Kd. Note: Do not round intermediate calculations. Input your answer as a percent rounded to 2 decima Cost of debt % b. Compute the cost of preferred stock, Kp Note: Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal Cost of preferred stock % c. Compute the cost of common equity in the form of retained earnings, K

a. Compute the cost of debt, Kd. Note: Do not round intermediate calculations. Input your answer as a percent rounded to 2 decima Cost of debt % b. Compute the cost of preferred stock, Kp Note: Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal Cost of preferred stock % c. Compute the cost of common equity in the form of retained earnings, K

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

See similar textbooks

Similar questions

Western Electric Utility Company faces increasing needs for capital. Fortunately, it has an A (low) credit rating. The corporate tax rate is 30 percent. Western’s treasurer is trying to determine the corporation’s current weighted average cost of capital to assess the profitability of capital budgeting projects. Historically, the corporation’s earnings and dividends per share have increased at about a 6.0 percent annual rate. Western Electric’s common stock is selling at $60 per share, and the company will pay a $4.50 per share dividend (D1). The company’s $100 preferred stock has been yielding 9 percent in the current market. Flotation costs for the company have been estimated by its investment dealer to be $1.50 for preferred stock. The company’s optimum capital structure is 40 percent debt, 10 percent preferred stock, and 50 percent common equity in the form of retained earnings. Refer to the table below on bond issues for comparative yields on bonds of equal risks to Western…
Western Electric Utility Company faces increasing needs for capital. Fortunately, it has an A (low) credit rating. The corporate tax rate is 30 percent. Western’s treasurer is trying to determine the corporation’s current weighted average cost of capital to assess the profitability of capital budgeting projects. Historically, the corporation’s earnings and dividends per share have increased at about a 6.0 percent annual rate. Western Electric’s common stock is selling at $60 per share, and the company will pay a $4.50 per share dividend (D1). The company’s $100 preferred stock has been yielding 9 percent in the current market. Flotation costs for the company have been estimated by its investment dealer to be $1.50 for preferred stock. The company’s optimum capital structure is 40 percent debt, 10 percent preferred stock, and 50 percent common equity in the form of retained earnings. Refer to the table below on bond issues for comparative yields on bonds of equal risks to Western…
Kielly Machines Inc. is planning an expansion program estimated to cost $100 million. Kielly is going to raise funds according to its target capital structure shown below. Debt 0.30 Preferred stock 0.24 Equity 0.46 Kielly had net income available to common shareholders of $184 million last year of which 75% was paid out in dividends. The company has a marginal tax rate of 40%. Additional data: The before-tax cost of debt is estimated to be 11%. The market yield of preferred stock is estimated to be 12%. The after-tax cost of common stock is estimated to be 16% What is Kielly's weighted average cost of capital? Select one: a. 14.00% b. 12.22% c. 13.54% d. 13.00%
Flagstaff Enterprises expected to have free cash flow in the coming year of $8 million, and this free cash flow is expected to grow at a rate of 3% per year thereafter. Flagstaff has an equity cost of capital of 13%, a debt cost of capital of 7%, and it is in the 35% corporate tax bracket. Flagstaff maintains a constant debt-to-equity ratio of 0.5. Assume that capital markets are perfect except for the existence of corporate taxes. a)What is Flagstaff's after-tax WACC? b)What is the value of Flagstaff as a levered firm? c)What is the value of Flagstaff's interest tax shield? d)Briefly discuss the trade-off theory. What is the optimal capital structure according to the trade-off theory?
A company is interested in measuring its overall cost of capital. Current investigation has gathered the following data. Firm is in 40% tax bracket. Common stock: The firm’s common stock is currently selling for R85 per share. The firm expects to pay cash dividends of R5 per share next year. The firm’s dividends have been growing at an annual rate of 6%, and this growth is expected to continue into the future. The stock must be underpriced by R5 per share, and flotation costs are expected to amount to R3 per share. The firm can sell an unlimited amount of new common stock under these terms Calculate the cost of common stock.
Suppose that you are analysing the capital requirements for your Corporation for next year. You forecast that the company will need $15 million to fund all of its positive-NPV projects and you job is to determine how to raise the money. The corporation’s net income is $11 million, and it has paid a $2 dividend per share (DPS) for the past several years (1 million shares of common stock are outstanding); its shareholders expect the dividend to remain constant for the next several years. The company’s target capital structure is 30% debt and 70% equity. H. If a firm follows the residual distribution policy, what actions can it take when its forecasted retained earnings are less than the retained earnings required to fund its capital budget? I. Define the term ‘Dividend Policy’? What are the main elements of the Dividend Policy? J. What are the different theories on investor preference for dividends? Explain each theory?
es Edsel Research Labs has $26.40 million in assets. Currently half of these assets are financed with long-term debt at 6 percent and ha with common stock having a par value of $10. Ms. Edsel, the Vice President of Finance, wishes to analyze two refinancing plans, one with more debt (D) and one with more equity (E). The company earns a return on assets before interest and taxes of 8 percent. The tax rate is 30 percent. Under Plan D, a $6.60 million long-term bond would be sold at an interest rate of 8 percent and 660,000 shares of stock would be purchased in the market at $10 per share and retired. Under Plan E, 660,000 shares of stock would be sold at $10 per share and the $6,600,000 in proceeds would be used to reduce long-term debt. a-1. Compute earnings per share considering the current plan and the two new plans. Note: Round your answers to 2 decimal places. Current Plan D Plan E Earnings per Share $ $ $ 0.42 0.20 1.26 a-2. Which plan(s) would produce the highest EPS? Note that…
Edsel Research Labs has $28.20 million in assets. Currently half of these assets are financed with long-term debt at 5 percent and half with common stock having a par value of $10. Ms. Edsel, the Vice President of Finance, wishes to analyze two refinancing plans, one with more debt (D) and one with more equity (E). The company earns a return on assets before interest and taxes of 5 percent. The tax rate is 30 percent. Under Plan D, a $7.05 million long-term bond would be sold at an interest rate of 7 percent and 705,000 shares of stock would be purchased in the market at $10 per share and retired. Under Plan E, 705,000 shares of stock would be sold at $10 per share and the $7,050,000 in proceeds would be used to reduce long-term debt. a-1. How would each of these plans affect earnings per share? Consider the current plan and the two new plans. (Round your answers to 2 decimal places.) Earnings per Share Current Plan D Plan E a-2. Which…
Longstreet Communications Inc. (LCI) has the following capital structure, which it considers to be optimal: debt = 25% (LCI has only long-term debt), preferred stock = 15%, and common stock = 60%. LCI’s tax rate is 25%, and investors expect earnings and dividends to grow at a constant rate of 6% in the future. LCI paid a dividend of $3.70 per share last year (D0), and its stock currently sells at a price of $60 per share. Ten-year Treasury bonds yield 6%, the market risk premium is 5%, and LCI’s beta is 1.3. The following terms would apply to new security offerings. Preferred stock: New preferred stock could be sold to the public at a price of $100 per share, with a dividend of $9. Flotation costs of $5 per share would be incurred. Debt: Debt could be sold at an interest rate of 9%. Common stock: All new common equity will be raised internally by reinvesting earnings. Find the component costs of debt, preferred stock, and common stock. What is the WACC?
PWC Inc. has a policy of distributing 30% of its current year income after interest and taxes. Which of the following statement is true in relation to this limited information? a. PWC Inc. has a 70% retention ratio b. PWC Inc. has a dividend yield of 70% c. 70% of the capital of PWC Inc. is funded by debt d. PWC Inc. has already satisfied its capital budget for the year. Which of the following is not a practical thing to consider in determining the company’s dividend policy? a. Legal restrictions b. Cash position c. Ownership control d. Prevailing interest rates
For the next fiscal year, you forecast net income of $48,700 and ending assets of $506,100. Your firm's payout ratio is 10.1%. Your beginning stockholders' equity is $295,600 and your beginning total liabilities are $119,300. Your non-debt liabilities such as accounts payable are forecasted to increase by $10,500. What is your net new financing needed for next year? The Tax Cuts and Jobs Act of 2017 temporarily allowed 100% bonus depreciation (effectively expensing capital expenditures). However, we will still include depreciation forecasting in this chapter and in these problems. The net financing required will be $ (Round to the nearest dollar.)
A company expected to have free cash flow in the coming year of $8 million, and this free cash flow is expected to grow at a rate of 3% per year thereafter. The company has an equity cost of capital of 13%, a debt cost of capital of 7%, and it has a 35% corporate tax rate. If the company maintains a .5 debt to equity ratio, then what is Flagstaff's pre-tax WACC?

SEE MORE QUESTIONS

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS