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
Mackenzie Company has a price of $34 and will issue a dividend of $2.00 next year. It has a beta of 1.5, the risk-free rate is 5.2%, and the market risk premium is estimated to be 5.2%. a. Estimate the equity cost of capital for Mackenzie. b. Under the CDGM, at what rate do you need to expect Mackenzie's dividends to grow to get the same equity cost of capital as in part (a)?
Mackenzie Company has a price of $32 and will issue a dividend of $2.00 next year. It has a beta of 1.1, the risk-free rate is 5.9%, and the market risk premium is estimated to be 4.8%. a. Estimate the equity cost of capital for Mackenzie. b. Under the CDGM, at what rate do you need to expect Mackenzie's dividends to grow to get the same equity cost of capital as in part (a)? a. Estimate the equity cost of capital for Mackenzie. The equity cost of capital for Mackenzie is %. (Round to two decimal places.)
Global Pistons (GP) has common stock with a market value of $450 million and debt with a value of $321 million. Investors expect a 15% return on the stock and a 5% return on the debt. Assume perfect capital markets. a. Suppose GP issues $321 million of new stock to buy back the debt. What is the expected return of the stock after this transaction? b. Suppose instead GP issues $48.94 million of new debt to repurchase stock. i. If the risk of the debt does not change, what is the expected return of the stock after this transaction? ii. If the risk of the debt increases, would the expected return of the stock be higher or lower than when debt is issued to repurchase stock in part (i)? a. Suppose GP issues $321 million of new stock to buy back the debt. What is the expected return of the stock after this transaction? If GP issues $321 million of new stock to buy back the debt, the expected return is _______________ (Round to two decimal places.)
Use the information below to calculate Weighted Average Cost of Capital, assuming that no new shares will need to be sold and a capital structure that is 50% debt and 50% equity. coupon rate on bonds 13.00% corporate tax rate 25.00% anticipated dividend $5.00 yield to maturity on bonds 11.00% current share price $100.00 floatation costs 5.00% expected growth rate 7.00% a. 10.13% b. 10.26% c. 12.13% d. 11.88%
Radon Inc. is financing its new invention with issuance of 10 shares of 6 years 4.5% coupon bond with yield to maturity 6%, 60 shares of preferred stock with dividend $2.5 and return of 10%, and 800 shares of common equity at current price of $15 per share. If its common stock has beta 1.6 and long-term risk free rate is 3% and market risk premium is 6%. What is the Weighted Average Cost of Capital given its tax rate is 30%? Ignore floatation costs (Please show work)
Global Pistons (GP) has common stock with a market value of $380 million and debt with a value of $245 million, Investors expect a 17% return on the stock and a 4% return on the debt. Assume perfect capital markets. a. Suppose GP issues $245 million of new stock to buy back the debt. What is the expected return of the stock after this transaction? b. Suppose instead GP issues $53.63 million of new debt to repurchase stock. 1. If the risk of the debt does not change, what is the expected return of the stock after this transaction? 1. If the risk of the debt increases, would the expected return of the stock be higher or lower than when debt is issued to repurchase stock in part (0)7 a. Suppose GP issues $245 million of new stock to buy back the debt. What is the expected return of the stock after this transaction? If GP issues $245 million of new stock to buy back the debt, the expected return is [17%. (Round to two decimal places.)
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?
What is the WACC for a company with the following information: Equity Information: 50 million shares, $80 per share, Beta = 1.15, Market risk premium =9%, Risk-free rate = 5%. Debt Information: 1 million outstanding bonds with a face value of $1,000 each. Current Price = $1,100, Coupon rate = 9%, semiannual coupons, 15 years to maturity Tax rate = 20%
A group of investors is intent on purchasing a publicly traded company and wants to estimate the highest price they can reasonably justify paying. The target company's equity beta is 1.20 and its debt-to-firm value ratio, measured using market values, is 60 percent. The investors plan to improve the target's cash flows and sell it for 12 times free cash flow in year five. Projected free cash flows and selling price are as follows. ($ millions) Year 5 1 $38 Free cash flows 2 3 4 $53 $58 $63 $ 63 $ 756 Selling price Total free cash flows $38 $53 $58 $63 $819 To finance the purchase, the investors have negotiated a $530 million, five-year loan at 8 percent interest to be repaid in five equal payments at the end of each year, plus interest on the declining balance. This will be the only interest-bearing debt outstanding after the acquisition. Selected Additional Information Tax rate 40 percent Risk-free interest rate 3 percent Market risk premium 5 percent a. Estimate the target firm's…
A group of investors is intent on purchasing a publicly traded company and wants to estimate the highest price they can reasonably justify paying. The target company’s equity beta is 1.20 and its debt-to-firm value ratio, measured using market values, is 60 percent. The investors plan to improve the target’s cash flows and sell it for 12 times free cash flow in year five. Projected free cash flows and selling price are as follows. ($ millions) Year 1 2 3 4 5 Free cash flows $38 $53 $58 $63 $ 63 Selling price $ 756 Total free cash flows $38 $53 $58 $63 $ 819 To finance the purchase, the investors have negotiated a $530 million, five-year loan at 8 percent interest to be repaid in five equal payments at the end of each year, plus interest on the declining balance. This will be the only interest-bearing debt outstanding after the acquisition. Selected Additional Information Tax rate 40 percent Risk-free interest rate 3 percent Market risk…

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