Killer Burgers' capital structure consists of 20 percent debt, 30 percent preferred stock, and 50 percent common stock. If Killer raises new capital, its after-tax cost of debt will be3.5 percent, its cost of preferred stock will be 7 percent, its cost of retained earnings will be 10.2 percent, and its cost of new common equity will be 11.2 percent. Killer must raise$150,000. If management expects the firm to generate $65,000 in retained earnings this year, what is Killer's marginal cost of capital to raise the needed funds? Round your answerto two decimal places.%

To calculate Killer Burgers' marginal cost of capital (MCC), we will follow these steps, given that…

Answered: Killer Burgers' capital structure…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter12: The Cost Of Capital

Section: Chapter Questions

Problem 11P

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Killer Burgers' capital structure consists of 40 percent debt, 10 percent preferred stock, and 50 percent common stock. If Killer raises new capital, its after-tax cost of debt will be 5.5 percent, its cost of preferred stock will be 8 percent, its cost of retained earnings will be 13.5 percent, and its cost of new common equity will be 14.5 percent. Killer must raise $130,000. If management expects the firm to generate $60,000 in retained earnings this year, what is Killer's marginal cost of capital to raise the needed funds? Round your answer to two decimal places. _______ %
Halfdome believes that its optimal capital structure consists of 55% common equity and 45% debt, and its tax rate is 25%. Halfdome must raise additional capital to fund its upcoming expansion. The firm will have $4 million of retained earnings with a cost of . New common stock in an amount up to $8 million would have a cost of . Furthermore, Halfdome can raise up to $4 million of debt at an interest rate of and an additional $5 million of debt at . The CFO estimates that a proposed expansion would require an investment of $8.2 million. What is the weighted average cost of capital (WACC) for the last dollar raised to complete the expansion? (Assume that cost of debt is 9% and cost of equity is 12.5%). 12.69% 8.45% 10.32% 9.91% None of the above
Olsen Outfitters Inc. believes that its optimal capital structure consists of 50% common equity and 50% debt, and its tax rate is 25%. Olsen must raise additional capital to fund its upcoming expansion. The firm will have $1 million of retained earnings with a cost of rs = 13%. New common stock in an amount up to $9 million would have a cost of re = 15.0%. Furthermore, Olsen can raise up to $4 million of debt at an interest rate of r = 10% and an additional $4 million of debt at ra = 14%. The CFO estimates that a proposed expansion would require an Investment of $3.6 million. What is the WACC for the last dollar raised to complete the expansion? Round your answer to two decimal places. %
Olsen Outfitters Inc. believes that its optimal capital structure consists of 55% common equity and 45% debt, and its tax rate is 25%. Olsen must raise additional capital to fund its upcoming expansion. The firm will have $2 million of retained earnings with a cost of rs = 13%. New common stock in an amount up to $9 million would have a cost of re = 15.5%. Furthermore, Olsen can raise up to $3 million of debt at an interest rate of rd = 11% and an additional $3 million of debt at rd = 12%. The CFO estimates that a proposed expansion would require an investment of $5.6 million. What is the WACC for the last dollar raised to complete the expansion? Round your answer to two decimal places. %
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Olsen Outfitters Inc. believes that its optimal capital structure consists of 65% common equity and 35% debt, and its tax rate is 25%. Olsen must raise additional capital to fund its upcoming expansion. The firm will have $4 million of retained earnings with a cost of rs = 10%. New common stock in an amount up to $9 million would have a cost of re = 13.0%. Furthermore, Olsen can raise up to $3 million of debt at an interest rate of rd = 11% and an additional $6 million of debt at rd = 15%. The CFO estimates that a proposed expansion would require an investment of $7.4 million. What is the WACC for the last dollar raised તો
Olsen Outfitters Inc. believes that its optimal capital structure consists of 55% common equity and 45% debt, and its tax rate is 40%. Olsen must raise additional capital to fund its upcoming expansion. The firm will have $4 million of retained earnings with a costof rs 5 11%. New common stock in an amount up to $8 million would have a cost of re 5 12.5%. Furthermore, Olsen can raise up to $4 million of debt at an interest rate of rd 5 9% and an additional $5 million of debt at rd 5 13%. The CFO estimates that a proposed expansion would require an investment of $8.2 million. What is the WACC for the last dollar raised to complete the expansion?
Matsumoto Limited (ML), a large conglomerate firm, has a capital structure that currently consists of 20 percent long-term debt, 10 percent preferred stock, and 70 percent common equity. ML has determined that it will raise funds in the future using 40 percent long-term debt, 10 percent preferred stock, and 50 percent common equity.ML can raise up to $60 million in the long-term debt market at a pretax cost of 15 percent. Beyond $60 million, the pretax cost of long-term debt is expected to increase to 17 percent. Preferred stock can be raised at a cost of 19 percent. The limited demand for this security permits ML to sell only $20 million of preferred stock. ML’s marginal tax rate is 40 percent. ML’s stock currently sells for $30 per share and has a beta of 1.2. ML pays no dividends and is not expected to pay any dividends for the foreseeable future. Investment advisory services expect the stock price to increase from its current level of $30 per share to a level of $84.46 per share at…
Poly is planning for P5 million in capital expenditures next year. Poly’s target capital structure consists of 60% debt and 40% equity. If net income next year is P3 million and Poly follows a residual distribution policy with all distributions as dividends, what will be its dividend payout ratio?
Travis & Sons has a capital structure that is based on 40 percent debt, 5 percent preferred stock, and 55 percent common stock. The pretax cost of debt is 7.5 percent, the cost of preferred is 9.6 percent, and the cost of common stock is 13 percent. The tax rate is 21 percent. The company is considering a project that is as risky as the overall firm. This project has initial costs of $325,000 and annual cash inflows of $87,000, $279,000, and $116,000 over the next three years, respectively. What is the projected net present value of this project? $71,821.94 $76,011.23 $68,211.04 $74272.98
XYZ company is entirely equity financed, with 12 million shares of common stock outstanding. The stock currently trades at $48.50 per share. XYZ is evaluating a growth project which will cost $45 million. The project will bring in $11 million earnings (cash flows) per year in perpetuity. XYZ’s current cost of capital is 11.5 percent. The company could be more valuable if it included debt in its capital structure, so XYZ management is evaluating whether the company should issue debt to entirely finance the project. If the company uses debt, then the debt will carry a 7% interest expense. XYZ has a 40 percent corporate tax rate (state and federal). 1. If XYZ wishes to maximize its total market value, would you recommend that it issue debt or equity to finance the land purchase? Explain. 2. Construct XYZ’s market value balance sheet before it announces the purchase. 3. Suppose XYZ decides to issue equity to finance the purchase. a. What is the net present value of the project? b.…

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