EBK PEARSON ETEXT PRINCIPLES OF MANAGER
15th Edition
ISBN: 9780136846901
Author: SMART
Publisher: VST
expand_more
expand_more
format_list_bulleted
Videos
Textbook Question
Chapter 9, Problem 9.16P
Cost of capital Edna Recording Studios Inc. reported earnings available to common stock of $4,200,000 last year. From those earnings, the company paid a dividend of $1.26 on each of its 1,000,000 common shares outstanding. The capital structure of the company includes 40% debt, 10%
- a. If the market price of the common stock is $40 and dividends are expected to grow at a rate of 6% per year for the foreseeable future, what is the required return on the company’s common stock, and thus the company’s cost of
retained earnings financing? - b. If underpricing and flotation costs on new shares of common stock amount to $7.00 per share, what is the company’s cost of new common stock financing?
- c. The company can issue a $2.00 dividend preferred stock for a market price of $25.00 per share. Flotation costs would amount to $3.00 per share. What is the cost of preferred stock financing?
- d. The company can issue $1,000-par-vatue, 10% coupon, 5-year bonds that can be sold for $1,200 each. Flotation costs would amount to $25.00 per bond. Use the estimation formula to figure the approximate cost of debt financing.
- e. What is the WACC?
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
identify the primary sources of financing, both traditional and alternative, accessible to companies seeking sources of funding. To do so, you should:
Collect and curate data and documentary resources from various sources (magazine articles, newspapers, online content, working papers from various institutions, activity reports, performance reports, legal regulations, speeches, appearances, press conferences, etc.).
Analyze the documentary content you have previously curated and collected. During your analysis, consider the context, location, timing, and target audience of the texts.
Reference Article: One Park Financial. (2022). Best alternative business loans and financing for entrepreneurs. https://www.oneparkfinancial.com/blog/alternative-business-funding
Questions:
Identify and summarize the traditional financial avenues available to businesses.
What are the most innovative financing options they could find?
Open-ended question: if you were in the opposite position, as an…
XYZ stock price and dividend history are as follows:
Beginning-of-
$ 130
Dividend Paid at
Year
Year Price
Year-End
2021
$ 2
2022
2023
153
2
2024
128
133
2
2
An investor buys five shares of XYZ at the beginning of 2021, buys another two shares at the beginning of 2022, sells one share at the
beginning of 2023, and sells all six remaining shares at the beginning of 2024.
Required:
a. What are the arithmetic and geometric average time-weighted rates of return for the investor?
Note: Do not round intermediate calculations. Round your answers to 2 decimal places.
Arithmetic time-weighted average returns
Geometric time-weighted average returns
%
%
b-1. Prepare a chart of cash flows for the four dates corresponding to the turns of the year for January 1, 2021, to January 1, 2024.
Note: Negative amounts should be indicated by a minus sign.
Date
01/01/2021
01/01/2022
Cash Flow
01/01/2023
01/01/2024
b-2. What is the dollar-weighted rate of return? (Hint. If your calculator cannot calculate…
Consider the following two banks:
Bank 1 has assets composed solely of a 10-year, 11.50 percent coupon, $1.5 million loan with a 11.50 percent yield to maturity. It is
financed with a 10-year, 10 percent coupon, $1.5 million CD with a 10 percent yield to maturity.
Bank 2 has assets composed solely of a 7-year, 11.50 percent, zero-coupon bond with a current value of $1,108,283.85 and a maturity
value of $2,374,515.87. It is financed with a 10-year, 5.75 percent coupon, $1,500,000 face value CD with a yield to maturity of 10
percent.
All securities except the zero-coupon bond pay interest annually.
a. If interest rates rise by 1 percent (100 basis points), what is the difference in the value of the assets and liabilities of each bank?
Note: Do not round intermediate calculations. Negative amounts should be indicated by a minus sign. Enter the answers in
dollars, not millions of dollars. Round your answers to 2 decimal places. (e.g., 32.16)
Before Interest
Asset Value
After Interest…
Chapter 9 Solutions
EBK PEARSON ETEXT PRINCIPLES OF MANAGER
Ch. 9.1 - What is the cost of capital?Ch. 9.1 - Prob. 9.2RQCh. 9.1 - Prob. 9.3RQCh. 9.1 - What are the typical sources of long-term capital...Ch. 9.2 - Prob. 9.5RQCh. 9.2 - Prob. 9.6RQCh. 9.2 - Prob. 9.7RQCh. 9.3 - How would you calculate the cost of preferred...Ch. 9.4 - What premise about share value underlies the...Ch. 9.4 - How do the constant-growth valuation model and...
Ch. 9.4 - Why is the cost of financing a project with...Ch. 9.5 - Prob. 9.13RQCh. 9.5 - Prob. 9.14RQCh. 9.5 - Prob. 9.15RQCh. 9 - In the chapter opener you learned that Johnson ...Ch. 9 - Learning Goals 3, 4, 5, 6 ST9-1 Individual...Ch. 9 - Prob. 9.1WUECh. 9 - Prob. 9.2WUECh. 9 - Duke Energy has been paying dividends steadily for...Ch. 9 - Weekend Warriors Inc. has 35% debt and 65% equity...Ch. 9 - Oxy Corporation uses debt, preferred stock, and...Ch. 9 - Concept of cost of capital and WACC Mace...Ch. 9 - Prob. 9.2PCh. 9 - Before-tax cost of debt and after-tax cost of debt...Ch. 9 - Prob. 9.4PCh. 9 - The cost of debt Gronseth Drywall Systems Inc. is...Ch. 9 - After-tax cost of debt Bella Wans is interested in...Ch. 9 - Cost of preferred stock Taylor Systems has just...Ch. 9 - Cost of preferred stock Determine the cost for...Ch. 9 - Cost of common stock equity: CAPM Netflix common...Ch. 9 - Retained earnings versus new common stock Using...Ch. 9 - The effect of tax rate on WACC K. Bell Jewelers...Ch. 9 - WACC: Market value weights The market values and...Ch. 9 - WACC: Book weights and market weights Webster...Ch. 9 - WACC and target weights After careful analysis,...Ch. 9 - Cost of capital Edna Recording Studios Inc....Ch. 9 - Calculation of individual costs and WACC Dillon...Ch. 9 - Prob. 9.18PCh. 9 - Calculation of individual costs and WACC Lang...Ch. 9 - Weighted average cost of capital (WACC) American...Ch. 9 - Prob. 9.21PCh. 9 - Eco Plastics Company Since its inception, Eco...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- TIME TO REACH A FINANCIAL GOAL You have $42,180.53 in a brokerage account, and you plan to deposit an additional $5,000 at the end of every future year until your account totals $250,000. You expect to earn 12% annually on the account. How many years will it take to reach your goal? Round UP to the nearest year. (Example 5.01 years = 6 years) Your answer should include numerical value only.arrow_forwardYou plan to retire in 30 years. • In 50 years, you want to give your daughter a $500,000 gift. • You will receive an inheritance of $200,000 in 25 years. • You think you will want $50,000 per year when you retire for 30 years (the first withdrawal will come one year after retirement). • You will begin saving an amount to meet your retirement goals one year from today. Required: • If you think you can make 9% on your investments, how much will you need to save each year for the next 30 years to meet your retirement goals?arrow_forwardAn initial $3300 investment was worth $3820 after two years and six months. What quarterly compounded nominal rate of return did the investment earn? (Do not round intermediate calculations and round your final answer to 2 decimal places.) Nominal rate of return % compounded quarterly.arrow_forward
- Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 9 percent, and that the maximum allowable payback and discounted payback statistics for the project are 2.0 and 3.0 years, respectively.arrow_forwardPlease don't use Ai solutionarrow_forwardng Equipment is worth $998,454. It is expected to produce regular cash flows of $78,377 per year for 20 years and a special cash flow of $34,800 in 20 years. The cost of capital is X percent per year and the first regular cash flow will be produced in 1 year. What is X? Input instructions: Input your answer as the number that appears before the percentage sign. For example, enter 9.86 for 9.86% (do not enter .0986 or 9.86%). Round your answer to at least 2 decimal places. percentarrow_forward
- 3 years ago, you invested $6,700. In 5 years, you expect to have $12,201. If you expect to earn the same annual return after 5 years from today as the annual return implied from the past and expected values given in the problem, then in how many years from today do you expect to have $25,254?arrow_forward4 years ago, you invested $3,600. In 2 years, you expect to have $7,201. If you expect to earn the same annual return after 2 years from today as the annual return implied from the past and expected values given in the problem, then in how many years from today do you expect to have $10,022? Input instructions: Round your answer to at least 2 decimal places. yearsarrow_forwardSince ROE can sometimes be boosted artificially through financial leverage, do you think it would be more beneficial for investors to rely on a combination of ROE and other financial health indicators, such as the debt-to-equity ratio or interest coverage ratio, when assessing a stock's long-term potential?arrow_forward
- Given that Merck and Pfizer both face revenue risks from patent expirations, how do you think financial managers at these companies should adjust their capital structure to maintain stability and investor confidence?arrow_forwardDon't used hand raiting and don't used Ai solutionarrow_forwardJohn works for a fixed income hedge fund. Your fund invests in $100 million in mortgage-backed-bonds (MBS) with a duration of 10. He finances these bonds with $2 million in investor capital and $98 million of overnight repurchase agreements (required haircut=2%) with an interest rate of 1%. After hours, negative news comes out on the evening news that increases yields on MBS by 25 basis points. Moreover, effective tomorrow, because of this bad news, repurchase agreement lenders will now require a haircut of 3% to lend to you via repurchase agreements with your MBS as collateral. Assuming he receives no interest payments from your MBS, how much cash does he need to not default on today’s repurchase agreement and to keep the position open for one more day tomorrow? Please provide calculations in excel.arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Financial ratio analysis; Author: The Finance Storyteller;https://www.youtube.com/watch?v=MTq7HuvoGck;License: Standard Youtube License