Dynamic World Vista Industries (DWVI) wishes to estimate its cost of capital for use in analyzing projects that are similar to those that already exist. The firm's current capital structure, in terns of market value, includes 30 percent corporate bond, 10% irredeemable loan notes, 10% preference shares and 50%ordinary shares. The firm's corporate bond has an average yield to maturity of 8.3%. DWVI also has an irredeemable loan notes currently trading at GHC40 ex interest, an interest rate of five (5) percent. Its preference shares have a GHC70 par value, an 8 percent dividend, and are currently selling for GHC76 per share. DWVI's beta is 1.05, return on riskless asset is 4% and the return on the GSE (the market proxy) is 11.4%. The industry is in 40% marginal tax bracket. Required: What are DWVI's pre-tax costs of debts, preference shares and ordinary shares? Calculate DWVI's weighted average cost of capital (WACC) on both a pre-tax and after-tax basis. Vhich WACC should DWVI uses when making investment decisions and why?

Dynamic World Vista Industries (DWVI) wishes to estimate its cost of capital for use in analyzing projects that are similar to those that already exist. The firm's current capital structure, in terns of market value, includes 30 percent corporate bond, 10% irredeemable loan notes, 10% preference shares and 50%ordinary shares. The firm's corporate bond has an average yield to maturity of 8.3%. DWVI also has an irredeemable loan notes currently trading at GHC40 ex interest, an interest rate of five (5) percent. Its preference shares have a GHC70 par value, an 8 percent dividend, and are currently selling for GHC76 per share. DWVI's beta is 1.05, return on riskless asset is 4% and the return on the GSE (the market proxy) is 11.4%. The industry is in 40% marginal tax bracket. Required: What are DWVI's pre-tax costs of debts, preference shares and ordinary shares? Calculate DWVI's weighted average cost of capital (WACC) on both a pre-tax and after-tax basis. Vhich WACC should DWVI uses when making investment decisions and why?

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

(Weighted average cost of capital) As a member of the Finance Department of Ranch Manufacturing, your supervisor has asked you to compute the appropriate discount rate to use when evaluating the purchase of new packaging equipment for the plant. Under the assumption that the firm's present capital structure reflects the appropriate mix of capital sources for the firm, you have determined the market value of the firm's capital structure as follows: To finance the purchase, Ranch Manufacturing will sell 10-year bonds paying interest at a rate of 6.9 percent per year (with semiannual payment) at the market price of $1,046. Preferred stock paying a $1.97 dividend can be sold for $24.17. Common stock for Ranch Manufacturing is currently selling for $54.79 per share and the firm paid a $2.93 dividend last year. Dividends are expected to continue growing at a rate of 5.4 percent per year into the indefinite future. If the firm's tax rate is 30 percent, what discount rate should you use to…
Chelsea Gonzales Industries is trying to estimate the firm's optimal capital structure. The company has $100 million in assets, which is financed with $40 million of debt and $60 million in equity. The risk-free rate, KRF, is 3 percent, the market risk premium, km – krf, is 8 percent, and the firm's tax rate is 40 percent. Currently, the firm's cost of equity (ks) is 16.72 percent (determined on the basis of the CAPM). What would the firm's estimated cost of equity be if it were to change its capital structure from its present capital structure to 30 percent debt and 70 percent equity? A. 16.76 percent B. 15.32 percent C. 16.28 percent D. 15.69 percent E. 15.22 percent A B O D ΟΕ
MacG, Inc. has an equity market capitalization of $7,800,000. Its equity beta is 4.2. The risk-free rate and market return are expected to be 1.4% and 7.2%, respectively. MacG also has 3,500,000 in bonds that have a yield-to-maturity of 5.4%. If MacG faces a tax rate of 14%, which is the weighted average cost of capital for MacG? Edit View Insert Format Tools Table 12pt ✓ Paragraph В І U Al А ✓ T² V 20 ► V :
(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.)
(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 10.1 percent. Interest payments are $50.50 and are paid semiannually. The bonds have a current market value of $1,122 and will mature in 10 years. The firm's marginal tax rate is 34 percet. b. A new common stock issue that paid a $1.85 dividend last year. The firm's dividends are expected to continue to grow at 7.8 percent per year, forever. The price of the firm's common stock is now $27.25. c. A preferred stock that sells for $150, pays a dividend of 8.8 percent, and has a $100 par value. d. A bond selling to yield 11.8 percent where the firm's tax rate is 34 percent. a. The after-tax cost of debt is %. (Round to two decimal places.)
Consider a project of the Cornell Haul Moving Company, the timing and size of the incremental after-tax cash flows (for an all-equity firm) are shown below in millions: Time Cash Flow -$ 990 125 250 375 500 The firm's tax rate is 34 percent; the firm's bonds trade with a yield to maturity of 8 percent; the current and target debt-equity ratio is 2; if the firm were financed entirely with equity, the required return would be 10 percent. What is the levered after-tax incremental cash flow for year 2? 0000 2 3 4 $185,796,000 $215,152,000 $284,848,000 $267,952,000
Barton Industries expects that its target capital structure for raising funds in the future for its capital budget will consist of 40% debt, 5% preferred stock, and 55% common equity. Note that the firm's marginal tax rate is 25%. Assume that the firm's cost of debt, rd, is 10.4%, the firm's cost of preferred stock, rp, is 9.6% and the firm's cost of equity is 13.0% for old equity, rs, and 13.3% for new equity, re. What is the firm's weighted average cost of capital (WACC1) if it uses retained earnings as its source of common equity? Do not round intermediate calculations. Round your answer to two decimal places.
Dillon Labs has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The weighted average cost is to be measured by using the following weights: 40% long-term debt, 15% preferred stock, and 45% common stock equity (retained earnings, new common stock, or both). The firm's tax rate is 26%. Debt The firm can sell for $1005 a 13-year, $1,000-par-value bond paying annual interest at a 6.00% coupon rate. A flotation cost of 2.5% of the par value is required. Preferred stock 7.00% (annual dividend) preferred stock having a par value of $100 can be sold for $98. An additional fee of $5 per share must be paid to the underwriters. Common stock The firm's common stock is currently selling for $80 per share. The stock has paid a dividend that has gradually increased for many years, rising from $2.50 ten years ago to the $4.92 dividend payment, D0, that the company just recently made. If…
The Black Bird Company plans an expansion. The expansion is to be financed by selling $21 million in new debt and $57 million in new common stock. The before-tax required rate of return on debt is 9.77% percent and the required rate of return on equity is 13.11% percent. If the company is in the 34 percent tax bracket, what is the weighted average cost of capital?
New Energy’s capital structure today is $1,347 million in Long Term Debt and $1,655 million in Common Equity. If its debt were issued today, New Energy would pay an interest rate of 8.2%/year (before tax). New Energy’s Cost of Equity is estimated to be 12%/year. Given a tax rate of 30%, what is New Energy’s Weighted Average Cost of Capital (WACC)? (Your answer should be a % carried to 2 places.)
Mary, Inc. is considering a project for next year, which will cost $5 million. Mary plans to use the following combination of debt and equity to finance the investment. Issue $1.5 million of 10-year bonds at a price of 101, with a coupon/contract rate of 4%, and flotation costs of 2% of par. Use $3.5 million of funds generated from retained earnings. The equity market is expected to earn 8%. U.S. Treasury bonds are currently yielding 3%. The beta coefficient for Mary, Inc. is estimated to be .70. Mary is subject to an effective corporate income tax rate of 30 percent. Compute Mary's expected rate of return using the Capital Asset Pricing Model (CAPM). Please show calculations.
A-Rod Manufacturing Company is trying to calculate its cost of capital for use in making a capital budgeting decision. Mr. Jeter, the vice-president of finance, has given you the following information and has asked you to compute the weighted average cost of capital. The company currently has outstanding a bond with a 11.4 percent coupon rate and another bond with an 9.0 percent rate. The firm has been informed by its investment banker that bonds of equal risk and credit rating are now selling to yield 12.3 percent. The common stock has a price of $68 and an expected dividend (D1) of $1.88 per share. The historical growth pattern (g) for dividends is as follows: $ 1.43 1.57 1.72 1.88 The preferred stock is selling at $88 per share and pays a dividend of $8.40 per share. The corporate tax rate is 30 percent. The flotation cost is 2.0 percent of the selling price for preferred stock. The optimum capital structure for the firm is 25 percent debt, 15 percent…

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