Goode Energy Corp. has the following capital structure: Equity weight: 70% Debt weight: 30% Before-tax cost of debt: 10% Cost of equity: 16% Tax rate: 25% What is Goode Energy's after-tax WACC?
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- Ogier Incorporated currently has $800 million in sales, which are projected to grow by 10% in Year 1 and by 5% in Year 2. Its operating profitability ratio (OP) is 10%, and its capital requirement ratio (CR) is 80%? What are the projected sales in Years 1 and 2? What are the projected amounts of net operating profit after taxes (NOPAT) for Years 1 and 2? What are the projected amounts of total net operating capital (OpCap) for Years 1 and 2? What is the projected FCF for Year 2?The Berndt Corporation expects to have sales of 12 million. Costs other than depreciation are expected to be 75% of sales, and depreciation is expected to be 1.5 million. All sales revenues will be collected in cash, and costs other than depreciation must be paid for during the year. Berndts federal-plus-state tax rate is 40%. Berndt has no debt. a. Set up an income statement. What is Berndts expected net income? Its expected net cash flow? b. Suppose Congress changed the tax laws so that Berndts depreciation expenses doubled. No changes in operations occurred. What would happen to reported profit and to net cash flow? c. Now suppose that Congress changed the tax laws such that, instead of doubling Berndts depreciation, it was reduced by 50%. How would profit and net cash flow be affected? d. If this were your company, would you prefer Congress to cause your depreciation expense to be doubled or halved? Why?Assume Plainfield Manufacturing has debt of $6,500,000 with a cost of capital of 9.5% and equity of $4,500,000 with a cost of capital of 11.5%. What is Tylers weighted average cost of capital?
- Assume Skyler Industries has debt of $4,500,000 with a cost of capital of 7.5% and equity of $5,500,000 with a cost of capital of 10.5%. What is Skylers weighted average cost of capital?Brower Co. is considering the following alternative financing plans: Income tax is estimated at 40% of income. Determine the earnings per share of common stock, assuming that income before bond interest and income tax is 2,000,000.The Moore Corporation has operating income (EBIT) of 750,000. The companys depreciation expense is 200,000. Moore is 100% equity financed, and it faces a 40% tax rate. What is the companys net income? What is its net cash flow?
- COST OF CAPITAL Coleman Technologies is considering a major expansion program that has been proposed by the companys information technology group. Before proceeding with the expansion, the company must estimate its cost of capital. Suppose you are an assistant to Jerry Lehman, the financial vice president. Your first task is to estimate Colemans cost of capital Lehman has provided you with the following data, which he believes may be relevant to your task. The firms tax rate is 25%. The current price of Colemans 12% coupon, semiannual payment, noncallable bonds with 15 years remaining to maturity, is 1.153.72. Coleman does not use short-term, interest-bearing debt on a permanent basis. New bonds would be privately placed with no flotation cost. The current price of the firms 10%, 100.00 par value, quarterly dividend, perpetual preferred stock is 111.10. Colemans common stock is currently selling for 50.00 per share. Its last dividend (D0) was 4.19, and dividends are expected to grow at a constant annual rate of 5% in the foreseeable future. Colemans beta is 1.2, the yield on T-bonds is 7%, and the market risk premium is estimated to be 6%. For the bond-yield-plus-risk-premium approach, the firm uses a risk premium of 4%. Colemans target capital structure is 30% debt, 10% preferred stock, and 60% common equity. To structure the task somewhat, Lehman has asked you to answer the following questions: a. 1. What sources of capital should be included when you estimate Colemans WACC? 2. Should the component costs be figured on a before-tax or an a after-tax basis? 3. Should the costs be historical (embedded) costs or new (marginal) costs? b. What is the market interest rate on Colemans debt and its component cost of debt? c. 1. What is the firms cost of preferred stock? 2. Colemans preferred stock is riskier to investors than its debt, yet the preferreds yield to investors is lower than the yield to maturity on the debt Does this suggest that you have made a mistake? (Hint: Think about taxes) d. 1. Why is there a cost associated with retained earnings? 2. What is Colemans estimated cost of common equity using the CAPM approach? e. What is the estimated cost of common equity using the DCF approach? f. What is the bond-yield-plus-risk-premium estimate for Colemans cost of common equity? g. What is your final estimate for rs? h. Explain in words why new common stock has a higher cost than retained earnings. i. 1. What are two approaches that can be used to adjust for flotation costs? 2. Coleman estimates that if it issues new common stock, the flotation cost will be 15%. Coleman incorporates the flotation costs into the DCF approach. What is the estimated cost of newly issued common stock, considering the flotation cost? j. What is Colemans overall, or weighted average, cost of capital (WACC)? Ignore flotation costs. k. What factors influence Colemans composite WACC? l. Should the company use the composite WACC as the hurdle rate for each of its projects? Explain.The capital structure of Ridley Enterprises Is: Debt 40%, Equity 60%. The cost of debt is 13%, and the cost of equity is 16.5%. What is the weighted average cost of capital for Ridley Enterprises? A. 14.4% B. 15.1% C. 16.2% D. 13.8%Define each of the following terms: Weighted average cost of capital, WACC; after-tax cost of debt, rd(1 – T); after-tax cost of short-term debt, rstd(1 – T) Cost of preferred stock, rps; cost of common equity (or cost of common stock), rs Target capital structure Flotation cost, F; cost of new external common equity, re
