Sand Key Development Company has a capitalstructure consisting of $20 million of 10% debt and$30 million of common equity. The firm has500,000 shares of common stock outstanding.Sand Key is planning a major expansion and willneed to raise $15 million. The firm must decidewhether to finance the expansion with debt orequity. If equity financing is selected, commonstock will be sold at $75 per share. If debt financingis chosen, 8% coupon bonds will be sold. The firm'smarginal tax rate is 34%. Determine the level ofoperating income at which Sand Key would beindifferent between debt financing and equityfinancing. $4, 625,000 $6,200,000 $5,150,000 $5,675,000 $6,725,000

Certainly! The question asks us to find the level of operating income at which Sand Key would be…

Answered: Sand Key Development Company has a…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter12: The Cost Of Capital

Section: Chapter Questions

Problem 17P

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Sand Key Development Company has a capital structure consisting of $20 million of 10% debt and $30 million of common equity. The firm has 500,000 shares of common stock outstanding. Sand Key is planning a major expansion and will need to raise $15 million. The firm must decide whether to finance the expansion with debt or equity. If equity financing is selected, common stock will be sold at $75 per share. If debt financing is chosen, 5% coupon bonds will be sold. The firm's marginal tax rate is 34%. Determine the level of operating income at which Sand Key would be indifferent between debt financing and equity financing.
IRIS Corp. has determined its optimal capital structure as follows. Debt: The firm can sell a 10-year, $1,000 par value, 7 percent bond for $950. A flotation cost of 3percent of the par value would be required in addition to the discount of $50. Preferred Stock: The firm has determined it can issue preferred stock at $45 per share par value. The stock will pay an $6.5 annual dividend. The cost of issuing and selling the stock is $2.5 per share. Common Stock: The firm's common stock is currently selling for $25 per share. The dividend expected to be paid at the end of the coming year is $3.75. Its dividend payments have been growing at a constant rate for the last five years. Five years ago, the dividend was $1.45. It is expected that to sell, a new common stock issue must be underpriced at $2 per share and the firm must pay $0.75 per share in flotation costs. Additionally, the firm's marginal tax rate is 20 percent. Calculate the firm's weighted average cost of capital assuming the…
Global Internet company is looking to expand their operations. They are evaluating their cost of capital based on various financing options. Investment bankers informed them that they can issue new debt in the form of bonds at a cost of 8%, and issue new preferred stocks for the price of $25 per share paying $2.5 dividends per share. Their common stock is currently selling for $20 per share and will pay a dividend of $1.5 per share next year. They expect a growth rate in dividends of 5% per year, and their marginal tax rate is 35%. f Global raises capital using 30% debt, 5% preferred stock, and 65% common stock what is their cost of capital? [Note: you are supposed to show every step of your calculation and interpret the result.]
NEKO Inc. has forecasted that its net income will be P520,000. The company has an debt-to-equity ratio of 25%. The dividend policy of the firm follows the residual dividend model. NEKO Inc. has a project that needs funding amounting to P600,000. The number of issued and outstanding shares of NEKO Inc. is 5,000. How much of the project must be funded by equity?
Sierra Vista Industries (SVI) wishes to estimate its cost of capital for the use in the analyzing projects that are similar to those that already exist. The firm’s current capital structure in terms of market value includes 40 percent debt, 10 percent preference shares and 50 percent ordinary shares. The firm’s debt has as average yield to maturity of 8.3 percent. Its preference shares have a GH¢ 70 par value, an 8 percent dividend, and are currently selling for GH¢ 76 per share. SVI’s beta is 1.05, risk-free rate is 4 percent and return on the S&P 500 (the market proxy) is 11.4 percent. SVI is in the 40 percent marginal tax bracket. 1. what are SVI’s pre-tax costs of debt, preference shares and ordinary shares? 2. Calculate SVI’s weighted average cost of capital (WACC) on both a pre-tax and an after-tax basis. Which WACC should SVI use when making investment decisions? 3. SVIS is contemplating a major investment that is expected to increase both its operation and financial…
TRD company is looking to expand their operations. They are evaluating their cost of capital based on various financing options. Investment bankers informed them that they can issue new debt in the form of bonds at a cost of 8%, and issue new preferred stocks for the price of $25 per share paying $2.5 dividends per share. Their common stock is currently selling for $20 per share and will pay a dividend of $1.5 per share next year. They expect a growth rate in dividends of 5% per year, and their marginal tax rate is 35%. a) If TRD raises capital using 45%debt,5%preferred stock,and 50%common stock. What is their cost of capital? b)If TRD raises capital using 30%debt,5%preferred stock,and65%common stock.What is their cost of capital? c)Evaluate the two finance options and identify which one they should choose?
National Inc. has forecasted that its net income will be P520,000. The company has an debt-to-equity ratio of 25%. The dividend policy of the firm follows the residual dividend model. National Inc. has a project that needs funding amounting to P600,000. The number of issued and outstanding shares of National Inc. is 5,000. How much of the project must be funded by equity? a. P450,000 b. P480,000 c. P120,000 d. P150,000
AX Co. needs financing a new project. Issue costs would be 3% of market value for a new bond issue, $0.2 per share for ordinary shares, $0.1 per share for preference shares. The ordinary share dividends for next year will be $0.5 and are projected to have an annual growth rate of 5%. What is the weighted cost of capital if the firm finances in the proportions shown in the financing structure table? Market prices are $101 for bonds, $5 for preference shares and $10 for ordinary shares. There will be $25,000 retained profits available. The company tax rate is 30%. Financing structure table for the new project of AX Co. Type of financing Bonds (8%, $100 par, 5-yeare maturity) Percentage of financing 40 Preference shares (4,000 shares outstanding, $0.3 dividend per share) 20 Ordinary equity 40 Total 100
A company needed ghc 1000 to finance its activities. The firm can financed this expenditure either by bonds or equity. Interest rate on bonds is 10%. The company can earn ghc 160 in good years and ghc80 in bad years. Assuming the firm faces equal probability of good and bad years; i What will be the stream of returns on both bonds and equity if the company chooses the following financing options a 100% equity financing b 50% equity financing c 20% equity financing d 0% equity financing ii Estimate the equity risk associated with each option in (i) iii As an investor who wants to purchase a share in the company, which financing option will make you purchase the stock. Why????
Choo Choo Corp. is an all- equity firm with a market value of $5, 200, 000. The firm is considering a debt issue of $3, 900, 000 at an 8% interest rate and will use the funds to buy back shares in the firm. There are currently 200, 000 shares outstanding and it is a perfect capital market. 14. If the firm keeps its current capital structure and the EBIT is expected to be $750, 000, what would be Choo-Choo's EPS? A) $3.75 B) $8.76 C) $15.00 D) $2.19 E) $ 5.00 15. What is the breakeven level of EBIT between the two capital structures? A) $ 1, 664, 000 B) $1, 333, 333 C) $2, 100, 000 D) $554, 667 E) $416, 000
A firm has determined its optimal capital structure, which is composed of the following sources and target market value proportions: Debt: The firm can sell a 20-year, $1,000 par value, 9 percent bond for $980. A flotation cost of 2 percent of the face value would be required in addition to the discount of $20. Preferred Stock: The firm has determined it can issue preferred stock at $65 per share par value. The stock will pay an $8.00 annual dividend. The cost of issuing and selling the stock is $3 per share. Common Stock: The firm's common stock is currently selling for $40 per share. The dividend expected to be paid at the end of the coming year is $5.07. Its dividend payments have been growing at a constant rate for the last five years. Five years ago, the dividend was $3.45. It is expected that to sell, a new common stock issue must be underpriced at $1 per share and the firm must pay $1 per share in flotation costs. Additionally, the firm's marginal tax rate is 40 percent.…

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