Zera Manufacturing is interested in measuring its overall cost of capital. The firm is in the 40% tax bracket. Current investigation has gathered the following data: Debt: The firm can raise debt by selling bond to the market with RM 1,000 par value 10% coupon interest rate, 10-year bonds on which annual interest payments will be made but is able to realize only RM 950 due to 5 % commission to the broker. Preferred stock: The fim can sell 11% (annual dividend) preferred stock at its RM 100 per share par value. The cost of issuing and selling the preferred stock its expected to be RM 4 per share. Common stock: The fim's common stock is currently selling for RM 80 per share. The firm expects to pay dividend of RM 6 per share next year. The firm 's dividends have been growing at an annual rate of 6%, and this rate is expected to continue in the future. The capital structure is as follows: Debt (40%), Preferred stock (15%) and Common stock (45%). Calculate the firm's weighted average cost of capital.

Zera Manufacturing is interested in measuring its overall cost of capital. The firm is in the 40% tax bracket. Current investigation has gathered the following data: Debt: The firm can raise debt by selling bond to the market with RM 1,000 par value 10% coupon interest rate, 10-year bonds on which annual interest payments will be made but is able to realize only RM 950 due to 5 % commission to the broker. Preferred stock: The fim can sell 11% (annual dividend) preferred stock at its RM 100 per share par value. The cost of issuing and selling the preferred stock its expected to be RM 4 per share. Common stock: The fim's common stock is currently selling for RM 80 per share. The firm expects to pay dividend of RM 6 per share next year. The firm 's dividends have been growing at an annual rate of 6%, and this rate is expected to continue in the future. The capital structure is as follows: Debt (40%), Preferred stock (15%) and Common stock (45%). Calculate the firm's weighted average cost of capital.

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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The DW Media Group has an equity beta of 1.2 and 50% debt (debt over firm value) in its capitalstructure. The company has risk-free debt that costs 4% before taxes, and the expected rate of returnof the stock market is 12%. DW is considering the acquisition of a new project in publishing businessthat is expected to yield 20% on after-tax operating cash flow. Penguin Publishing House, which hasthe same business model (and risk class) as the project being considered, has an equity beta of 1.5 andhas no debt in its capital structure. Assume that the marginal tax rate for both companies is 40%.1. What is the cost of capital of Penguin Publishing House?2. If DW finances the new publishing project with 50% debt, what is the cost of capital of thisproject?3. Under the estimated cost of capital, should DW take the project or not?
MacG, Inc. has an equity market capitalization of $7,800,000. Its equity beta is 4.2. The risk-free rate and market return are expected to be 1.4% and 7.2%, respectively. MacG also has 3,500,000 in bonds that have a yield-to-maturity of 5.4%. If MacG faces a tax rate of 14%, which is the weighted average cost of capital for MacG? Edit View Insert Format Tools Table 12pt ✓ Paragraph В І U Al А ✓ T² V 20 ► V :
A firm has a bank loan with a 10% interest rate. The firm also has in issue 8% preference shares trading at nominal value and has estimated that its cost of ordinary shares is 18%. The firm has a 30% tax rate. What is the weighted average cost of capital if the firm uses a capital structure comprising 50% debt and an even split between preference and ordinary shares?
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Optimist Company can sell common shares at $30 per share and can obtain debt funding at 8 percent. It has a marginal income tax rate of 25 percent. The yield on US Treasury securities is 3 percent. The market risk premium is 6.0 percent, and the firm's beta is 0.9. It has a targeted debt-to-equity ratio of 1:1. What is its after-tax cost of debt? Maximum number of characters (including HTML tags added by text editor): 32,000 Show Rich-Text Editor (and character count)
Assume that you were recently hired as assistant to Jerry Lehman, financial VP of Coleman Technologies. Your first task is to estimate Coleman’s cost of capital. Lehman has provided you with the following data, which he believes is relevant to your task: The firm’s marginal tax rate is 40%. The current price of Coleman’s 12 % coupon, semiannual payment, noncallable bonds with 15 years remaining to maturity is $1,153.72. Coleman does not use short-term interest-bearing debt on a permanent basis. New bonds would be privately placed with no flotation cost. The current price of the firm’s 10%, $100 par value, quarterly dividend, perpetual preferred stock is $113.10. Coleman would incur flotation costs of $2 per share on a new issue. Coleman’s common stock is currently selling at $50 per share. Its last dividend (D0) was $4.19, and dividends are expected to grow at a constant rate of 5% in the foreseeable future. Coleman’s beta is 1.2, the yield on Treasury bonds is 7%, and the market risk…
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ABC Inc. borrows money at 9%, sells bonds at 8%, and the purchasers of common stock require 13% rate of return. If the company has borrowed $40 million, sold $60 million in bonds, and sold $100 million worth of common stocks, what is the Weighted Average Cost of Capital (WACC)? If the same company from the previous question used 5% ROR for loans, 9% ROR for bonds, and 12% ROR for stocks, and also used a 50% tax rate, what is the WACC?
Jenkins, Inc., has equity with a market value of $23.1 million and debt with a market value of $9.24 million. The cost of debt is 10 percent per year. Treasury bills that mature in one year yield 6 percent per year, and the expected return on the market portfolio over the next year is 11 percent. The beta of the company’s equity is 1.16. The firm pays no taxes. What is the cost of capital for an otherwise identical all-equity firm?

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