Which projects should LEI accept? Why?
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LEI Corporation has the following capital structure: Debt 35%,
LEI is expected to pay a dividend of $4 per share next year, its stock currently sells for $50 per share, and investors expect dividends to grow at a constant rate of 6% in the future. LEI’s tax rate is 40%.
LEI can obtain new capital in the following ways:
- Preferred stock with a dividend of $10 can be sold to the public at a price of $100 per share.
- Debt can be issued at a coupon rate of 15%.
- Determine the cost of each capital component.
- Calculate the Weighted Average Cost of Capital (WACC).
- LEI has the following investment opportunities that are average-risk projects for the firm:
|
Project |
Cost |
|
|
A |
$20,000 |
13% |
|
B |
17,000 |
12.5% |
|
C |
15,000 |
12% |
|
D |
14,000 |
11.5% |
|
E |
12,000 |
11% |
Which projects should LEI accept? Why?
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- LEI Corporation has the following capital structure: Debt 35%, Preferred stock 15%, and Common equity 50%. LEI is expected to pay a dividend of $4 per share next year, its stock currently sells for $50 per share, and investors expect dividends to grow at a constant rate of 6% in the future. LEI's tax rate is 40%. LEI can obtain new capital in the following ways: Preferred stock with a dividend of $10 can be sold to the public at a price of $100 per share. Debt can be issued at a coupon rate of 15%. a. Determine the cost of each capital component. b. Calculate the Weighted Average Cost of Capital (WACC). c. LEI has the following investment opportunities that are average-risk projects for the firm: Project Cost Internal Rate of Return A $20,000 13% B 17,000 12.5% C 15,000 12% D 14,000 11.5% E 12,000 11% Which projects should LEI accept? Why?Company X has the following capital structure, which it considers to be optimal: Debt =33%, Preferred stock = 28%, Common equity = 39% Company X’s tax rate is 25% and investors expect earnings and dividends to grow at a constant rate of 6.5% in the future. Company X is expected to pay a dividend of $4.40 per share next year, and its stock currently sells at a price of $55 per share. Company X can obtain new capital in the following ways: • Preferred: New preferred stock with a dividend of $13 can be sold to the public at a price of $109 per share. • Debt: Debt can be sold at an interest rate of 11%. Calculate and answer the following: A. Cost of Common equity? B. Cost of Preferred Equity?C. Cost of debt?D. Weighted Average Cost of Capital (WACC)E. Which source of capital is the most costly?Cybernauts, Ltd., is a new firm that wishes to determine an appropriate capital structure. It can issue 16 percent debt or 15 percent preferred stock. The total capitalization of the company will be $5 million, and common stock can be sold at $20 per share. The company is expected to have a 50 percent tax rate (federal plus state). Four possible capital structures being considered are as follows: PLAN DEBT PREFERRED EQUITY 1 0% 0% 100% 2 30 0 70 3 50 0 50 4 50 20 30 a. Construct an EBIT - EPS chart for the four plans. (EBIT is expected to be $1 million.) Be sure to identify the relevant indifference points and determine the horizontal - axis intercepts. b. Which plan is best? Why?
- The DupT corporation plans to do a common stock issue to fund its next equity investment project. The market price of the corporation's stock is $ 75 per share. A dividend of $ 5 per share is expected to be paid at the end of the year. The corporation has had an average annual growth of 6%. The issue cost is $ 2.50 per share. Determine the cost of equity capital using Gordon's constant growth method (Gordon Growth Model). You will have to show the counts.LOFTA Corporation is interested in measuring the cost of each specific type of capital as well as the weighted average cost of capital. Historically, the firm has raised capital in the following manner: The tax rate of the firm is currently 30%. The needed financial information and data are as follows: Debt LOFTA can raise debt by selling $1,000-par-value, 6.5% coupon interest rate, 10-year bonds on which annual interest payments will be made. To sell the issue, an average discount of $20 per bond needs to be given. There is an associated flotation cost of 2% of par value. Preferred stock Preferred stock can be sold under the following terms: The security has a par value of $100 per share, the annual dividend rate is 6% of the par value, and the flotation cost is expected to be $4 per share. The preferred stock is expected to sell for $102 before cost considerations. Common stock The current price of Nova’s common stock is $35 per share. The cash dividend is expected to be $3.25 per…LOFTA Corporation is interested in measuring the cost of each specific type of capital as well as the weighted average cost of capital. Historically, the firm has raised capital in the following manner:  The tax rate of the firm is currently 30%. The needed financial information and data are as follows: Debt LOFTA can raise debt by selling $1,000-par-value, 6.5% coupon interest rate, 10-year bonds on which annual interest payments will be made. To sell the issue, an average discount of $20 per bond needs to be given. There is an associated flotation cost of 2% of par value. Preferred stock Preferred stock can be sold under the following terms: The security has a par value of $100 per share, the annual dividend rate is 6% of the par value, and the flotation cost is expected to be $4 per share. The preferred stock is expected to sell for $102 before cost considerations. Common stock The current price of Nova’s common stock is $35 per share. The cash dividend is expected to be…
- LOFTA Corporation is interested in measuring the cost of each specific type of capital as well as the weighted average cost of capital. Historically, the firm has raised capital in the following manner:  The tax rate of the firm is currently 30%. The needed financial information and data are as follows: Debt LOFTA can raise debt by selling $1,000-par-value, 6.5% coupon interest rate, 10-year bonds on which annual interest payments will be made. To sell the issue, an average discount of $20 per bond needs to be given. There is an associated flotation cost of 2% of par value. Preferred stock Preferred stock can be sold under the following terms: The security has a par value of $100 per share, the annual dividend rate is 6% of the par value, and the flotation cost is expected to be $4 per share. The preferred stock is expected to sell for $102 before cost considerations. Common stock The current price of Nova’s common stock is $35 per share. The cash dividend is expected to be…LOFTA Corporation is interested in measuring the cost of each specific type of capital as well as the weighted average cost of capital. Historically, the firm has raised capital in the following manner: The tax rate of the firm is currently 30%. The needed financial information and data are as follows: Debt LOFTA can raise debt by selling $1,000-par-value, 6.5% coupon interest rate, 10-year bonds on which annual interest payments will be made. To sell the issue, an average discount of $20 per bond needs to be given. There is an associated flotation cost of 2% of par value. Preferred stock Preferred stock can be sold under the following terms: The security has a par value of $100 per share, the annual dividend rate is 6% of the par value, and the flotation cost is expected to be $4 per share. The preferred stock is expected to sell for $102 before cost considerations. Common stock The current price of Nova’s common stock is $35 per share. The cash dividend is expected to be $3.25 per…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?
- Honda Inc. (HI) has the following capital structure, which it considers to be optimal: debt = 25%, preferred stock = 15%, and common stock = 60%. Honda Inc.’s tax rate is 40%, and investors expect earnings and dividends to grow at a constant rate of 6% in the future. Honda Inc. paid a dividend of $3.70 per share last year (D0), and its stock currently sells at a price of $60 per share. Ten-year Treasury bonds yield 6%, the market risk premium is 5%, and Honda Inc.’s beta is 1.3. The following terms would apply to new security offerings. Preferred: New preferred could be sold to the public at a price of $100 per share, with a dividend of $9. Flotation costs of $5 per share would be incurred. Debt: Debt could be sold at an interest rate of 9%. Common: New common equity will be raised only by retaining earnings a. Find the component costs of debt, preferred stock, and common stock. b. What is the WACC?The Black Bird Company plans an expansion. The expansion is to be financed by selling $21 million in new debt and $57 million in new common stock. The before-tax required rate of return on debt is 9.77% percent and the required rate of return on equity is 13.11% percent. If the company is in the 34 percent tax bracket, what is the weighted average cost of capital?Dillon Labs has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The weighted average cost is to be measured by using the following weights: 30% long-term debt, 10% preferred stock, and 60% common stock equity (retained earnings, new common stock, or both). The firm's tax rate is 23%. Debt : The firm can sell for $1030 a 14-year, $1,000-par-value bond paying annual interest at a 8.00% coupon rate. A flotation cost of 2% of the par value is required. Preferred stock: 9.00% (annual dividend) preferred stock having a par value of $100 can be sold for $92.An additional fee of $2 per share must be paid to the underwriters. Common stock: The firm's common stock is currently selling for $90 per share. The stock has paid a dividend that has gradually increased for many years, rising from $2.00 ten years ago to the $3.26 dividend payment, D0, that the company just recently made.…