In preparing its financial statements, Atrium Bhd. uses straight-line depreciation over theexpected life of fixed assets.The company's target capital structure is 30% debt and 70% common stock. The yield tomaturity on its bond is 10.5%. The risk-free rate of return (kr) is 5.5%, and the market rate ofreturn (KM) is 11%. The company's current beta is 1.81.Required:a. Calculate the company's weighted average cost of capital.b. Calculate the net present value (NPV) of the proposed investment and comment on yourfindings. Atrium Bhd. is a medium-sized manufacturing company that plans to increase capacity bypurchasing new machinery at an initial cost of RM3.5 million. The following are the mostrecent financial statements of the company:SalesProduction CostsGross ProfitAdministration and Distribution ExpensesIncome Statement for years ending 31 December2021RM000Profit before Interest and TaxInterestProfit before TaxTaxProfit after TaxDividendsRetained EarningsSelling price per unitProduction costs per unit2022RM000RM5002005,0003,0002,0002501,7503801,37040097039058035,0003,1001,9004001,5004001,370330The investment is expected to increase annual sales by 5,500 units. Investment inreplacement machinery would be needed after five (5) years. Financial data on the additionalunits to be sold is as follows:770390380Variable administration and distribution expenses are expected to increase by RM220,000per year as a result of the increase in capacity. In addition to the initial investment in newmachinery, RM500,000 would need to be invested in working capital. The investment inworking capital is released at the end of year 5.The scrap value of the machinery after five years is expected to be negligible.Tax liabilities are paid in the year in which they arise and Atrium Bhd. pays tax at 30% ofannual profits.

weight of debt = 30%weight of common stock = 70%Yield to maturity = 10.5%tax rate =30%risk-free rate…

Answered: In preparing its financial statements,…

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

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Saeed Construction’s CFO has the following information to estimate the company’s weighted average cost of capital:The company currently has 20-year, 8.5% semi-annual coupon bonds that currently sells for Rs.945.The company’s stock has a beta of 0.80.The market risk premium, RPm , equals 3%.The risk-free rate is 2.4% and market rate is 5.4%. The company’s growth (g) = 0%, stock price (P0) = Rs.50, current dividend (D0) = Rs.2 and additional/new equity flotation cost = 15%.The company has outstanding preferred stock that pays a Rs.2.00 annual dividend. The preferred stock sells for Rs.25 a share.The company’s tax rate is 40%. The company’s capital structure consists of 40% long-term debt, 40% common stock, and 20% preferred stock. Requirement: Calculate Component cost of debt, cost of equity, cost of preferred stock and weighted average cost of capital.
Divided Walls Construction (DWC) has determined that the yield to maturity (YTM) on new bonds is 5 percent, its cost of retained earnings is 8 percent, and its cost of new common stock is 11 percent. If DWC’s capital structure consists of 40% debt and 60$ common equity, what is its weighted average cost of capital (WACC) if it (a) does not have to issue new stock to raise additional funds and (b) must issue new stock to raise additional funds? DWC’s marginal tax rate is 35 percent.
A firm has determined its optimal capital structure which is composed of the following sources and target market value proportions. Additionally, the firm's marginal tax rate is 40 percent Source of Capital Market Proportions Long- term debt 20% Preferred stock 10% Common stock equity 70% Debt: The firm can sell a 12- year, $1,000 par value, 7 percent annual bond for $880. Preferred Stock: The firm has determined it can issue preferred stock at $75 per share par value. The stock will pay a $10 annual dividend. Common Stock: A firm's common stock is currently selling for $30 per share. The dividend expected to be paid at the end of the coming year is $1.5. Its dividend payments have been growing at a constant rate of 8% A. What is the firm’s cost of common stock? B. What is the firm’s cost of preferred stock? C. What is the firm’s cost of debt? D.…
On January 1, the total market value of the Tysseland Company was $60 million. During the year, the company plans to raise and invest $25 million in new projects. The firm's present market value capital structure, shown below, is considered to be optimal. Assume that there is no short-term debt. Debt $30,000,000 Common equity 30,000,000 Total capital $60,000,000 New bonds will have an 9% coupon rate, and they will be sold at par. Common stock is currently selling at $30 a share. The stockholders' required rate of return is estimated to be 12%, consisting of a dividend yield of 4% and an expected constant growth rate of 8%. (The next expected dividend is $1.20, so $1.20/$30 = 4%.) The marginal corporate tax rate is 35%. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the question below. Open spreadsheet In order to maintain the present capital structure, how much of the…
After careful analysis, Dexter Brothers has determined that its optimal capital structure is composed of the sources and target market value weights shown in the following table Source of capital Target market value weight Long-term debt 20% Preferred stock 13 Common stock equity 67 Total 100% The cost of debt is estimated to be 4.8%;the cost of preferred stock is estimated to be 11.7%;the cost of retained earnings is estimated to be 15.2%;and the cost of new common stock is estimated to be 17.2%.All of these are after-tax rates. The company's debt represents 15%,the preferred stock represents 8%,and the common stock equity represents 77%of total capital on the basis of the market values of the three components. The company expects to have a significant amount of retained earnings available and does not expect to sell any new common stock. a. Calculate the weighted average cost of capital on the basis of historical market value weights.…
ou have been assigned to calculate the weighted average cost of capital (WACC) of XYZ corporation. The target capital structure of XYZ is 45.00% debt and the remaining is common equity. XYZ's bonds have a yield of 8.00%. The corporation paid dividend of $0.61 and the future dividends are expected to grow at a constant rate of 6.00%. The current market price per share of common stock is $17.50. The flotation costs are 10.00% of price per share. The tax bracket is 40.00%. Calculate the WACC when the corporation is to finance its investments through a new stock issue.
1. Bradshaw Steel has a capital structure with 30 percent debt (all long-term bonds) and 70 percent common equity. The yield to maturity on the company’s long-term bonds is 8 percent, and the firm estimates that its overall composite WACC is 10 percent. The risk-free rate of interest is 5.5 percent, the market risk premium is 5 percent, and the company’s tax rate is 40 percent. Bradshaw uses the CAPM to determine its cost of equity. What is the beta on Bradshaw’s stock? 1.48 1.35 1.31 1.07 0.10 2. Calculate the market price today of a P1,000 bond which has 10 years until maturity and pays quarterly interest at an annual coupon rate of 12 percent. The required return on similar risk bonds is 20 percent. P845.66 P835.45 P2,201.08 P656.82 3. What happens to the annual price of a four-year, P1,000 bond with an 8% annual coupon when interest rates change from 8% to 6%? A price increase of P69.30. A price increase of P57.07. A price decrease of P57.09. No…
of capital. The weighted average cost is to be measured by using the following weights: 35% long-term debt, 20% preferred stock, and 45% common stock equity (retained K earnings, new common stock, or both). The firm's tax rate is 28%. Debt The firm can sell for $1000 a 11-year, $1,000-par-value bond paying annual interest at a 9.00 % coupon rate. A flotation cost of 3% of the par value is required. Preferred stock 7.50% (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 $2.70 ten years ago to the $4.00 dividend payment, Do, that the company just recently made. If the company wants to issue new new common stock, it will sell them $1.50 below the current market price to attract investors, and the company will pay $2.50 per share…
Crow Academy leadership wants to know its WACC given its current capital structure. The capital structure data is as follows. Equity: 2,843,200 shares outstanding, price $18.59, stock beta 0.96. Preferred stock: 675,000 shares outstanding, price $21.74, fixed dividend $0.75. Debt: 242,000 zero annual coupon bonds issued, price is 38% of par, 15 years to maturity. If the current market return is 14.28%, the risk-free rate is 3.18%, and the tax rate is 21%, what is the company's weighted average cost of capital (WACC)?
Baker Industries has a profit margin of 3%, a total asset turnover of 2, total assets of $60 million, revenue of $150 million, and equity of $20 million. Compute Baker's return on equity. Question 5 options: 9.0% 45.0% 18.0% 15.0%
Estimating Components of both WACC and DDMAn analyst estimates the cost of debt capital for Abbott Laboratories is 3.0% and that its cost of equity capital is 5.0%. Assume that ABT’s statutory tax rate is 21%, the risk-free rate is 2.1%, the market risk premium is 5%, the ABT market price is $84.10 per common share, and its dividends are $1.28 per common share.(a) Compute ABT’s average pretax borrowing rate and its market beta. (Round your answers to one decimal place.) Average borrowing rate = Market beta = (b) Assume that its dividends continue at the current level in perpetuity. Use the constant perpetuity dividend discount model to infer the market's expected cost of equity capital. (Hint: Use Price per share = Dividends per share/Cost of equity capital.) (Round your answer to one decimal place.)

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