BUS 225 DAYONE LL
17th Edition
ISBN: 9781264116430
Author: BLOCK
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Textbook Question
Chapter 11, Problem 1P
In March 2010, Hertz Pain Relievers bought a massage machine that provided a return of 8 percent. It was financed by debt costing 7 percent. In August, Mr. Hertz came up with a heating compound that would have a return of 14 percent. The chief financial officer, Mr. Smith, told him it was impractical because it would require the issuance of common stock at a cost of 16 percent to finance the purchase. Is the company following a logical approach to using its cost of capital?
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Students have asked these similar questions
Boswell Manufacturing Company has been in business for five years. Thecompany has now decided to expand its operations. To finance this process, the company is considering two approaches:
(1) Lease the assets that are needed on a long term basis or
(2) Issue bonds and use the proceeds to purchase the assets. The CEO is seeking your advice on the matter. Without knowledge of the comparative cost involved, how would you advise him in the following questions:
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You were hired as the CFO of a new company that was founded by three professors at your university. The company plans to manufacture and sell a new product, a cell phone that can be worn like a wrist watch. The issue now is how to finance the company, with equity only or with a mix of debt and equity. The price per phone will be $250.00 regardless of how the firm is financed. The expected fixed and variable operating costs, along with other data, are shown below. How much higher or lower will the firm's expected ROE be if it uses 60% debt rather than only equity, i.e., what is ROEL - ROEU?
0% Debt, U
60% Debt, L
Expected unit sales (Q)
33,500
33,500
Price per phone (P)
$250.00
$250.00
Fixed costs (F)
$1,000,000
$1,000,000
Variable cost/unit (V)
$200.00
$200.00
Required investment
$2,500,000
$2,500,000
% Debt
0.00%
60.00%
Debt, $
$0
??
Equity, $
$2,500,000
??
Interest rate
NA
10.00%
Tax rate
25.00%
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Group of answer choices…
Hassan Mustafa has recently started his new job as a financial manager in a firm called
ScanSoft. ScanSoft is developing a new process to manufacture optical disks. The development
costs were higher than expected, so ScanSoft requires an immediate cash inflow of $5,200,000.
To raise the required capital, the company decided to issue bonds. Since ScanSoft had no
expertise in issuing and selling bonds, Hassan suggested that the company work with an
investment dealer. The investment dealer bought the company's entire bond issue at a
discount, and then planned to sell the bonds to the public at face value or the current market
value. To ensure it would raise the $5,200,000 it required, ScanSoft plans to issue 5200 bonds
with a face value of $1000 each, on January 20, 2021. Interest is paid semi-annually on July 20
and January 20, beginning July 20, 2021. The bonds pay interest at 5.5% compounded semi-
annually.
Hassan Mustafa realized that when the bonds mature on January 20, 2041, there…
Chapter 11 Solutions
BUS 225 DAYONE LL
Ch. 11 - Why do we use the overall cost of capital for...Ch. 11 - How does the cost of a source of capital relate to...Ch. 11 - Prob. 3DQCh. 11 - Why is the cost of debt less than the cost of...Ch. 11 - What are the two sources of equity (ownership)...Ch. 11 - Explain why retained earnings have an associated...Ch. 11 - Why is the cost of retained earnings the...Ch. 11 - Why is the cost of issuing new common stock Kn...Ch. 11 - How are the weights determined to arrive at the...Ch. 11 - Explain the traditional, U-shaped approach to the...
Ch. 11 - Prob. 11DQCh. 11 - What effect would inflation have on a company’s...Ch. 11 - What is the concept of marginal cost of capital?...Ch. 11 - In March 2010, Hertz Pain Relievers bought a...Ch. 11 - Speedy Delivery Systems can buy a piece of...Ch. 11 - Prob. 3PCh. 11 - Prob. 4PCh. 11 - Calculate the aftertax cost of debt under each of...Ch. 11 - Prob. 6PCh. 11 - Prob. 7PCh. 11 - Prob. 8PCh. 11 - Airborne Airlines Inc. has a $1,000 par value bond...Ch. 11 - Russell Container Corporation has a $1,000 par...Ch. 11 - Prob. 11PCh. 11 - KeySpan Corp. is planning to issue debt that will...Ch. 11 - Medco Corporation can sell preferred stock for $90...Ch. 11 - Wallace Container Company issued $100 par value...Ch. 11 - Prob. 15PCh. 11 - Murray Motor Company wants you to calculate its...Ch. 11 - Compute KeandKn under the following...Ch. 11 - Business has been good for Keystone Control...Ch. 11 - Prob. 19PCh. 11 - Evans Technology has the following capital...Ch. 11 - Sauer Milk Inc. wants to determine the minimum...Ch. 11 - Given the following information, calculate the...Ch. 11 - Prob. 23PCh. 11 - Brook's Window Shields Inc. is trying to calculate...Ch. 11 - Prob. 25PCh. 11 - Prob. 26PCh. 11 - Delta Corporation has the following capital...Ch. 11 - The Nolan Corporation finds it is necessary to...Ch. 11 - The McGee Corporation finds it is necessary to...Ch. 11 - Eaton Electronic Company’s treasurer uses both...Ch. 11 - Compute the $ change in “Total Assets� over...Ch. 11 - Do the same computation for “Stockholders’...Ch. 11 - Do the same computation for “Long-Term Debt.�Ch. 11 - Prob. 5WE
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