Lingenburger Cheese Corporation has 7.5 million shares of common stock outstanding, 275,000 shares of 4.7 percent preferred stock outstanding, and 160,000 bonds with a semiannual coupon rate of 5.6 percent outstanding, par value $2,000 each. The common stock currently sells for $62 per share and has a beta of 1.10, the preferred stock has a par value of $100 and currently sells for $94 per share, and the bonds have 18 years to maturity and sell for 108 percent of par. The market risk premium is 7.2 percent, T-bills are yielding 3.4 percent, and the company's tax rate is 24 percent. a. What is the firm's market value capital structure? (Do not round intermediate calculations and round your answers to 4 decimal places, e.g., .1616.) b. If the company is evaluating a new investment project that has the same risk as the firm's typical project, what rate should the firm use to discount the project's cash flows? (Do not round intermediate calculations enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a. Debt a. Preferred stock a. Equity b. Discount rate 7,705,000,000.0000 0.2071 X 0.6926 X 11.00%

Understanding Business
12th Edition
ISBN:9781259929434
Author:William Nickels
Publisher:William Nickels
Chapter1: Taking Risks And Making Profits Within The Dynamic Business Environment
Section: Chapter Questions
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Lingenburger Cheese Corporation has 7.5 million shares of common stock outstanding,
275,000 shares of 4.7 percent preferred stock outstanding, and 160,000 bonds with a
semiannual coupon rate of 5.6 percent outstanding, par value $2,000 each. The
common stock currently sells for $62 per share and has a beta of 1.10, the preferred
stock has a par value of $100 and currently sells for $94 per share, and the bonds have
18 years to maturity and sell for 108 percent of par. The market risk premium is 7.2
percent, T-bills are yielding 3.4 percent, and the company's tax rate is 24 percent.
a. What is the firm's market value capital structure? (Do not round intermediate
calculations and round your answers to 4 decimal places, e.g., .1616.)
b. If the company is evaluating a new investment project that has the same risk as the
firm's typical project, what rate should the firm use to discount the project's cash
flows? (Do not round intermediate calculations enter your answer as a percent
rounded to 2 decimal places, e.g., 32.16.)
a. Debt
a. Preferred
stock
a. Equity
b. Discount rate
7,705,000,000.0000
0.2071 X
0.6926 X
11.00%
Transcribed Image Text:Lingenburger Cheese Corporation has 7.5 million shares of common stock outstanding, 275,000 shares of 4.7 percent preferred stock outstanding, and 160,000 bonds with a semiannual coupon rate of 5.6 percent outstanding, par value $2,000 each. The common stock currently sells for $62 per share and has a beta of 1.10, the preferred stock has a par value of $100 and currently sells for $94 per share, and the bonds have 18 years to maturity and sell for 108 percent of par. The market risk premium is 7.2 percent, T-bills are yielding 3.4 percent, and the company's tax rate is 24 percent. a. What is the firm's market value capital structure? (Do not round intermediate calculations and round your answers to 4 decimal places, e.g., .1616.) b. If the company is evaluating a new investment project that has the same risk as the firm's typical project, what rate should the firm use to discount the project's cash flows? (Do not round intermediate calculations enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a. Debt a. Preferred stock a. Equity b. Discount rate 7,705,000,000.0000 0.2071 X 0.6926 X 11.00%
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