KMS corporation has assets of $650 million, $130 million of which are cash. It has debt of $162.5 million. Suppose that KMS decides to initiate a dividend, but it wants the present value of payout to be $65 million. If its cost of equity capital is 10.7%, to what amount per year in perpetuity should it commit (assuming perfect capital market)? KMS should commit to $ million per year. (Round to two decimal places.)

KMS corporation has assets of $650 million, $130 million of which are cash. It has debt of $162.5 million. Suppose that KMS decides to initiate a dividend, but it wants the present value of payout to be $65 million. If its cost of equity capital is 10.7%, to what amount per year in perpetuity should it commit (assuming perfect capital market)? KMS should commit to $ million per year. (Round to two decimal places.)

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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Outhouse Bottled Water is comparing two different capital structures. Under plan A,Outhouse would have 100,000 shares of stock outstanding and no debt. Under plan B,there would be 75,000 shares outstanding and $1 million in debt outstanding. Theinterest rate on the debt is 10 percent and there are no taxes. What is the break-evenEBIT? In other words, what EBIT would produce the same EPS under either capitalstructure?
Adamson Corporation is considering four average-risk projects with the following costs and rates of return: Project Cost Expected Rate of Return 1 $2,000 16.00% 2 3,000 15.00 3 5,000 13.75 4 2,000 12.50 The company estimates that it can issue debt at a rate of rd 9%, and its tax rate is 25%. It can issue preferred stock that pays a constant dividend of $5.00 per year at $49.00 per share. Also, its common stock currently sells for $42.00 per share; the next expected dividend, D1, is $4.25; and the dividend is expected to grow at a constant rate of 6% per year. The target capital structure consists of 75% common stock, 15% debt, and 10% preferred stock. a. What is the cost of each of the capital components? Do not round intermediate calculations. Round your answers to two decimal places. Cost of debt: 6.75 % Cost of preferred stock: 10.20 % Cost of retained earnings: 14.67 % b. What is Adamson's WACC? Do not round intermediate calculations. Round your answer to two decimal places. 13.04…
Adamson Corporation is considering four average-risk projects with the following costs and rates of return: Project Cost Expected Rate of Return 1 $2,000 16.00% 2 3,000 15.00 3 5,000 13.75 4 2,000 12.50 The company estimates that it can issue debt at a rate of rd = 9%, and its tax rate is 35%. It can issue preferred stock that pays a constant dividend of $6 per year at $57 per share. Also, its common stock currently sells for $39 per share; the next expected dividend, D1, is $4.50; and the dividend is expected to grow at a constant rate of 5% per year. The target capital structure consists of 75% common stock, 15% debt, and 10% preferred stock. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below. What is the cost of each of the capital components? Round your answers to two decimal places. Do not round your intermediate calculations. Cost of debt _________% Cost…
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A firm is worth $50 or $180 with equal probability and is financed with debt that has a face value of $60. It is considering a new project that is equally likely to be worth - $50 or +$40. The cost of capital is 12% for all securities. 1. Calculate the present values of the firm’s debt and equity, assuming that the project is not undertaken. 2. What will happen to the value of the firm if the new project is undertaken?
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Meyer & Co. expects its EBIT to be $47,130 every year forever. The firm can borrow at 9 percent. Meyer currently has no debt, and the cost of assets is 12 percent, and the tax rate is 20 percent. The company borrows $180,000 and uses the proceeds to repurchase shares. What is the weighted average cost of capital?
The managers of an all-equity firm are interested in borrowing $1.2 million and using the proceeds to repurchase shares of stock. The firm's investment banker estimates that an appropriate interest rate on the debt is 5%. The firm's current cost of equity is 13% and its tax rate is 21%. Also, the company is expected to generate EBIT of $700,000 in perpetuity. If the managers pursue the capital restructuring plan, then what will be the value of the levered equity? $3,305,846.15 O $4,253,846.15 O $4,436,615.38 O $4,505.846.15 O $3,053,846.15
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An all-equity firm will spend $1,500,000 to expand the business. It has $100,000 in cash, can borrow up to $900,000, and can issue up to $1,000,000 in new equity. If the firm applies the pecking order theory of capital structure, what percentage of the expansion will be financed with debt?

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