Question 2 Robert Bernard is an investment analyst employed to JMMB. He was requested to assess the capital structure of Worthy Park Estate Rums and has provided the following information: Preferred Stock: 13 000 shares of 8 percent preferred stock issued at $100.00 per share. Current market price is $80 per share. Common Stock: 60 000 shares outstanding, selling for $105 per share. The current treasury bill rate is 12% and the stock's beta is 1.50. The expected rate of return on the average stock in the market is 16%. Debt The firm can borrow funds at 23% interest per year. Assume that the tax rate is 30%. a. Using the information above to calculate the firm's WACC if the target capital structure comprises 40% debt, 20% preferred stock and 40% common stock. b. If the beta of the stock was two (2) and the firm's capital structure was modified to 40% debt, 10% preferred stock, and 50% common, what is the firm's WACC? c. The firm is expected to pay a year end dividend of $10.00 per share at year end and its flotation cost if 10%. Investors have projected an expected growth rate of 8% per annum. i. What is the cost of retained earnings using the discounted cash flow approach? ii. Calculate the cost of issuing new common stock.
Question 2 Robert Bernard is an investment analyst employed to JMMB. He was requested to assess the capital structure of Worthy Park Estate Rums and has provided the following information: Preferred Stock: 13 000 shares of 8 percent preferred stock issued at $100.00 per share. Current market price is $80 per share. Common Stock: 60 000 shares outstanding, selling for $105 per share. The current treasury bill rate is 12% and the stock's beta is 1.50. The expected rate of return on the average stock in the market is 16%. Debt The firm can borrow funds at 23% interest per year. Assume that the tax rate is 30%. a. Using the information above to calculate the firm's WACC if the target capital structure comprises 40% debt, 20% preferred stock and 40% common stock. b. If the beta of the stock was two (2) and the firm's capital structure was modified to 40% debt, 10% preferred stock, and 50% common, what is the firm's WACC? c. The firm is expected to pay a year end dividend of $10.00 per share at year end and its flotation cost if 10%. Investors have projected an expected growth rate of 8% per annum. i. What is the cost of retained earnings using the discounted cash flow approach? ii. Calculate the cost of issuing new common stock.
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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Transcribed Image Text:Question 2
Robert Bernard is an investment analyst employed to JMMB. He was
requested to assess the capital structure of Worthy Park Estate Rums and
has provided the following information:
Preferred Stock:
13 000 shares of 8 percent preferred stock issued at $100.00 per share.
Current market price is
$80 per share.
Common Stock:
60 000 shares outstanding, selling for $105 per share. The current treasury
bill rate is 12% and
the stock's beta is 1.50. The expected rate of return on the average stock
in the market is 16%.
Debt
The firm can borrow funds at 23% interest per year. Assume that the tax
rate is 30%.
a. Using the information above to calculate the firm's WACC if the target
capital structure comprises 40% debt, 20% preferred stock and 40%
common stock.
b. If the beta of the stock was two (2) and the firm's capital structure was
modified to 40% debt, 10% preferred stock, and 50% common, what is the
firm's WACC?
c. The firm is expected to pay a year end dividend of $10.00 per share at
year end and its flotation cost if 10%. Investors have projected an
expected growth rate of 8% per annum.
i. What is the cost of retained earnings using the discounted cash
flow approach?
ii. Calculate the cost of issuing new common stock.
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