F1 Builtrite has come up with the following capital structure which management believes is optimal:Debt40%Preferred stock10%Common stock50%Bonds: Builtrite is planning on offering a $1000 par value, 20-year, 8% coupon bond with an expectedselling price of $1025. Flotation costs would be $55 per bond.Preferred Stock: Builtrite could sell a $49 par value preferred with an 8% coupon for $42 a share.Flotation costs would be $2 a share.Common stock: Currently, the stock is selling for $62 a share and has paid a $2.82 dividend. Dividendsare expected to continue growing at 10%. Flotation costs would be $3.75 a share and Builtrite has$350,000 in available retained earnings.Assume a 40% tax bracket.What is the after-tax cost of preferred stock?9.80%O 6.47%O 9.68%○ 8.76%#3EF3F4*-54R%285TF66YF7&7CFB8*COP

Here's a detailed calculation for better understanding.Since preferred stock dividends are not…

Answered: Builtrite has come up with the…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter12: The Cost Of Capital

Section: Chapter Questions

Problem 17P

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Newman International has an optimal capital structure that consists of 35.00% debt, 15.00% preferred equity, and 50.00% common equity. Their new bond issue will have a coupon rate of 7.20%. Their preferred stock currently sells for $40 per share, and floating new shares would cost $2.00 per share. The preferred dividend is fixed at $2.60 annually. Newman’s common stock has a current market price of $33.00, and floating new common shares would cost Newman 6.00% of the share price. The most recent annual common dividend paid was $2.50, and the dividend is expected to grow at an annual rate of 5.00%. The firm’s marginal tax rate is 30.00%. Use these data to calculate Newman’s WACC using internal equity and new common equity. Calculate the percentage to 2 decimal places
Newman International has an optimal capital structure that consists of 35.00% debt, 15.00% preferred equity, and 50.00% common equity. Their new bond issue will have a coupon rate of 7.20%. Their preferred stock currently sells for $40 per share, and floating new shares would cost $2.00 per share. The preferred dividend is fixed at $2.60 annually. Newman’s common stock has a current market price of $33.00, and floating new common shares would cost Newman 6.00% of the share price. The most recent annual common dividend paid was $2.50, and the dividend is expected to grow at an annual rate of 5.00%. The firm’s marginal tax rate is 30.00%. Use these data to calculate Newman’s after-tax cost of debt. Calculate the percentage to 2 decimal places (0.03148 = 3.15) 6
What is the Cost of Preferred Stock for Foggy Futures Weather Forecasters? The firm is in the 40% tax bracket. The optimal capital structure is listed below: The firm can sell preferred stock with a dividend that is 6% of the current price of $93. The cost of issuing and selling the stock is expected to be $6 per share. (NB: Use the intrinsic (internal) values (rates, cost) of each component in the capital structure.)
An investor is considering investing in the following two shares: Beta Fortress plc. 1.4 Castle plc 0.5 A) if the return on treasury bills is 5% and the market risk premium is 10%, what is the expected return of a portfolio made up of 40% fortress shares and 60% of castle shares? B) explain beta in the context of the CAPM and explain what the betas for fortress and castle shares imply about those shares C) shares in the empire plc have a beta of 0.9 and are expected to have a return of 16%. Given the information in part A are empire shares correctly priced according to the CAPM? Explain your answer and what is likely to happen to the shares in Empire PLC. D)explain what to the market risk premium and risk free rate of return in the CAPM represent. E)rxplain why it is difficult to empirically test the CAPM.
Preston Corp. is estimating its WACC. Its target capital structure is 20 percent debt, 20 percent preferred stock, and 60 percent common equity. Its bonds have a 12 percent coupon, paid semiannually, a current maturity of 20 years, and sells for $1,100. The firm could sell, at par, $100 preferred stock which pays a 7.57 percent annual dividend, but flotation costs of 5 percent would be incurred. Preston's beta is 1.2, the risk-free rate is 3 percent, and the market risk premium is 5 percent. The firm's marginal tax rate is 40 percent. What is Preston's WACC?
Coleman’s common stock is currently selling at $50 per share. Its last dividend (D0) was $4.19, and dividends are expected to grow at a constant rate of 5% in the foreseeable future. Coleman’s beta is 1.2, the yield on T-bonds is 7%, and the market risk premium is estimated to be 6%. For the own-bondyield-plus-risk-premium approach, the firm uses a 4% judgmental risk premium. Assume for now that Coleman Corp. does not plan to issue new shares of common stock. Find Coleman’s estimate cost of equity using: (a) the CAPM approach; (b) the dividend growth approach; and (c) the own-bond-yield-plus-judgmental-risk-premium method. What is your final estimate for the cost of equity, rs?
Tysseland company's present market value capital structure shwon below is optimal. There is no short-term debt. Capiatal Component: Market Value Debt 30,000,000 Common Equity 90,000,000 Bonds have an 8% coupon rate, and they will be sold at par. Common stock is currently selling at $30 a share. The stockholder's required rate of return is estimated to be 12%, consisting of a dividend yield of 4% and an expected growth rate of 8%. (The next expected dividend is $1.20, so the dividend yield is $1.20/$30 = 4%.) The marginal tax rate is 30%. What is Tysseland;s WACC?
Shares of the Pacific Electric Company (PEC) have an estimated Beta of 1.10. PEC funds its assets with 50 percent debt at an average after-tax cost of debt of 6 percent. The excess return of the market portfolio is 5 percent and the risk-free rate is 3 percent. Question A. what is PEC's estimated cost of equity according to the CAPM? Question B. what is PEC's estimated weighted average cost of capital?
Barton Industries estimates its cost of common equity by using three approaches: the CAPM, the band - yield - plus - nisk - premium approach, and the DCF model. Burton expects next year's annual dividend, D₁, to be $1.70 and it expects dividends to grow at a constant rate g = 5,4% The firm's current common stock price, Po, is $20.00. The current risk-free rate, FRF, = 4.9% the market risk premium, RPM = 6.3%, and the firm's stuck has a current beta, b, = 1.40. Assume that the firm's cast of debt, rd is 10.78%. The firm uses a 3.3% risk premium when arriving at a ballpark estimate of its cost of equity using the bund-vield-risk-premium approach. What is the firm's cost of equity using each of these three approaches? CAPM cost of equity. Band yield plus visle premium: DCF cost of equity: % 1. %
A firm is worth $50 or $180 with equal probability. Management wants to issue a bond that has a face value of $60. The cost of capital for all securities is 11%. If the potential bondholders fear that the firm will issue new debt with a face value of $50 that has the same priority as the $60 debt being sold today, what will they require as a return on their investment? Group of answer choices 27.2% 52.6% 39.9% 26.0%
What is the cost of Common Stock for Foggy Futures Weather Forecasters? The firm is in the 40% tax bracket. The optimal capital structure is listed below: The firm's common stock is currently selling for $95 per share. The firm expects to pay cash dividends of $5 per share next year. The dividends have been growing at 8%. The flotation costs amounted to $5 per share. (NB: Use the intrinsic (internal) values (rates, cost) of each component in the capital structure.)
Indell stock has a current market value of $130 million and a beta of 1.50. Indell currently has risk-free debt as well. The firm decides to change its capital structure by issuing $27.79 million in additional risk-free debt, and then using this $27.79 million plus another $17 million in cash to repurchase stock. With perfect capital markets, what will the beta of Indell stock be after this transaction? The beta of Indell stock after the recapitalization is www (Round to two decimal places.)

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