Problem 21-01 HBM, Inc has the following capital structure: Assets $450,000 Debt Preferred stock Common stock $180,000 22,500 247,500 The common stock is currently selling for $15 a share, pays a cash dividend of $0.85 per share, and is growing annually at 4 percent. The preferred stock pays a $5 cash dividend and currently sells for $92 a share. The debt pays interest of 8.5 percent annually, and the firm is in the 30 percent marginal tax bracket. a. What is the after-tax cost of debt? Round your answer to two decimal places. % b. What is the cost of preferred stock? Round your answer to two decimal places. % c. What is the cost of common stock? Assume that the current $0.85 dividend grows by 4 percent during the year. Round your answer to two decimal places. % d. What is the firm's weighted-average cost of capital? Round your answer to two decimal places. %

Problem 21-01 HBM, Inc has the following capital structure: Assets $450,000 Debt Preferred stock Common stock $180,000 22,500 247,500 The common stock is currently selling for $15 a share, pays a cash dividend of $0.85 per share, and is growing annually at 4 percent. The preferred stock pays a $5 cash dividend and currently sells for $92 a share. The debt pays interest of 8.5 percent annually, and the firm is in the 30 percent marginal tax bracket. a. What is the after-tax cost of debt? Round your answer to two decimal places. % b. What is the cost of preferred stock? Round your answer to two decimal places. % c. What is the cost of common stock? Assume that the current $0.85 dividend grows by 4 percent during the year. Round your answer to two decimal places. % d. What is the firm's weighted-average cost of capital? Round your answer to two decimal places. %

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter7: Analysis Of Financial Statements

Section: Chapter Questions

Problem 3P: Winston Watch’s stock price is $75 per share. Winston has $10 billion in total assets. Its balance...

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Winston Watch’s stock price is $75 per share. Winston has $10 billion in total assets. Its balance sheet shows $1 billion in current liabilities, $3 billion in long-term debt, and $6 billion in common equity. It has 800 million shares of common stock outstanding. What is Winston’s market/book ratio?
ALTERNATIVE DIVIDEND POLICIES Rubenstein Bros. Clothing is expecting to pay an annual dividend per share of 0.75 out of annual earnings per share of 2.25. Currently, Rubenstein Bros.' stock is selling for 12.50 per share. Adhering to the company's target capital structure, the firm has 10 million in total invested capital, of which 40% is funded by debt. Assume that the firm's book value of equity equals its market value. In past years, the firm has earned a return on equity (ROE) of 18%, which is expected to continue this year and into the foreseeable future. a. Based on this information, what long-run growth rate can the firm be expected to maintain? (Hint: g = Retention rate ROE.) b. What is the stock's required return? c. If the firm changed its dividend policy and paid an annual dividend of 1.50 per share, financial analysts would predict that the change in policy will have no effect on the firm's stock price or ROE. Therefore, what must be the firms new expected long-run growth rate and required return? d. Suppose instead that the firm has decided to proceed with its original plan of dis bursing 0.75 per share to shareholders, but the firm intends to do so in the form of a stock dividend rather than a cash dividend. The firm will allot new shares based on the current stock price of 12.50. In other words, for every 12.50 in dividends due to shareholders, a share of stock will be issued. How large will the stock dividend be relative to the firm's current market capitalist ion? (Hint. Remember that market capitalization = P0 number of shares outstanding.) e. If the plan in part d is implemented, how many new shares of stock will be issued, and by how much will the companys earnings per share be diluted?
RECAPITALIZATION Currently, Forever flowers Inc. has a capital structure consisting of 25% debt and 75% equity. Forever's debt currently has a 7% yield to maturity. The risk-free rate (rRF) is 6%, and the market risk premium (rM - rRF) is 7%. Using the CAPM, Forever estimates that its cost of equity is currently 14.5%. The company has a 40% tax rate. a. What is Forever's current WACC? b. What is the current beta on Forever's common stock? c. What would Forever's beta be if the company had no debt in its capital structure? (That is, what is Forever's unlevered beta, bU?) Forever's financial staff is considering changing its capital structure to 40% debt and 60% equity. If the company went ahead with the proposed change, the yield to maturity on the company's bonds would rise to 10.5%. The proposed change will have no effect on the company's tax rate. d. What would be the company's new cost of equity if it adopted the proposed change in capital structure? e. What would be the company's new WACC if it adopted the proposed change in capital structure? f. Based on your answer to part e, would you advise Forever to adopt the proposed change in capital structure? Explain.
RECAPITALIZATION Currently, Bloom Flowers Inc. has a capital structure consisting of 20% debt and 80% equity. Blooms debt currently has an 8% yield to maturity. The risk-free rate (rRF) is 5%, and the market risk premium (rM rRF) is 6%. Using the CAPM, Bloom estimates that its cost of equity is currently 12.5%. The company has a 40% tax rate. a. What is Blooms current WACC? b. What is the current beta on Blooms common stock? c. What would Blooms beta be if the company had no debt in its capital structure? (That is, what is Blooms unlevered beta, bU?) Blooms financial staff is considering changing its capital structure to 40% debt and 60% equity. If the company went ahead with the proposed change, the yield to maturity on the companys bonds would rise to 9 5%. The proposed change will have no effect on the companys tax rate. d. What would be the companys new cost of equity if it adopted the proposed change in capital structure? e. What would be the companys new WACC if it adopted the proposed change in capital structure? f. Based on your answer to Part e, would you advise Bloom to adopt the proposed change in capital structure? Explain.
Problem 1 The CCC Corporation made available the following data as requested: Total interest payments on bonds payable P60,000 Preferred stock dividends 20,000 Common Stock dividends 24,000 Annual growth on common stock dividend 2% Market Values of: Bonds Payable P400,000 Common Stock 300,000 Preferred…
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A company's capital structure is as follows. Em 10 million £1 ordinary shares 10 Reserves 4 13% irredeemable loan stock 7-21 -- Current market prices for the company' s securities are as follows. £1 ordinary shares 280p 13% irredeemable loan stock £100 The company is paying corporation tax at a rate of 30%. The cost of the company's equity capital has been estimated at 12% per annum. The company's weighted average cost of capital for capital investment appraisal purposes is A. 11.42% B. 12.20% C . 11.03% D. 12.30%
Global Technology's capital structure is as follows: Debt 35% Preferred stock 15% Common equity 50% The aftertax cost of debt is 6.5 percent; the cost of preferred stock is 10 percent; and the cost of common equity (in the form of retained earnings) is 13.5 percent. Calculate Global Technology's weighted average cost of capital in a manner similar to Table 11-1. Solution Problem 11-19 Instructions Complete the table below by entering formulas. United Business Forms Cost (aftertax) Weighted Cost Weights Debt (Kd) FORMULA 35% FORMULA Preferred stock (Kp) FORMULA 15% FORMULA Common equity (Ke) (retained earnings) FORMULA 50% FORMULA Weighted average cost of capital (Ka) FORMULA Please provide the Excel formulas with the solution.
E1 eBook Hook Industries's capital structure consists solely of debt and common equity. It can issue debt at rd = 8%, and its common stock currently pays a $3.75 dividend per share (Do = $3.75). The stock's price is currently $34.50, its dividend is expected to grow at a constant rate of 4% per year, its tax rate is 25%, and its WACC is 13.75%. What percentage of the company's capital structure consists of debt? Do not round intermediate calculations. Round your answer to two decimal places. %
Aaron Inc. bas 300 million shares outstanding expects earnings at the end of the year to be $ 628 million . The firm's equity cost of capital is 12 % Aaron pays out 50 % of its earnings in total 30 % paid out as dividends arid 20 % used to repurchase shares tf Aaron's earnings are expected to grow at a constant 6 % per year , what is Aaron's share price ? OA $ 25.65 OB $ 17.10 . OC . 18.55 OD . $ 34.20
25 The Western Pipe Company has the following capital section in its balance sheet. Its stock is currently selling for $7 per share. Common stock (30,000 shares at $1 par) Capital in excess of par Retained earnings Total equity. The firm intends to first declare a 15 percent stock dividend and then pay a 20-cent cash dividend (which also causes a reduction of retained earnings). Show the capital section of the balance sheet after the first transaction and then after the second transaction. (Do not round intermediate calculations and round your answers to the nearest whole dollar.) Western Pipe Co. After Stock Dividend Common stock Capital in excess of par Retained earnings Total equity Western Pipe Co. After Cash Dividend Common stock Capital in excess of par Retained earnings Total equity $ 30,000 30,000 150,000 $ 210,000 $ 0
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