Explore BrainMass

Preferred Stock and Cash Discounts

This content was STOLEN from BrainMass.com - View the original, and get the already-completed solution here!

Question 1: Your firm, People's Consulting Group, has been asked to consult on a potentially preferred stock offering by Brave New World. This 15% preferred stock issue would be sold at its par value of $35 per share. Flotation costs would total $3 per share. Calculate Brave New World's cost of preferred stock.

Question 2: Initiating a cash discount. Gardner Company currently makes all sales on credit and offers no cash discount. The firm is considering offering a 2% cash discount for payment within 15 days. The firm's current average collection period is 60 days, sales are 40,000 units, selling price is $45 per unit, and variable cost per unit is $36. The firm expects that the change in credit terms will result in an increase in sales to 42,000 units, that 70% of the sales will take the discount, and that the average collection period will fall to 30 days. If the firm's required rate of return on equal-risk investments is 25%, should the proposed discount be offered? (Note: Assume a 365-day year.)

© BrainMass Inc. brainmass.com October 25, 2018, 6:16 am ad1c9bdddf

Solution Summary

This solution is comprised of a detailed, step by step response which illustrates how to solve for preferred stock and proposed discount. In order to view the solution, an Excel file attachment needs to be opened.

See Also This Related BrainMass Solution

Discount cash flows on the proposed venture at the firm's WACC

16. Capital Structure. Examine the following book-value balance sheet for University Products, Inc. What is the capital structure of the firm on the basis of market values? The preferred stock currently sells for $15 per share and the common stock for $20 per share. There are 1 million common shares outstanding.

17. Calculating WACC. Turn back to University Products's balance sheet from the previous prob- lem. If the preferred stock pays a dividend of $2 per share, the beta of the common stock is .8, the market risk premium is 10%, the risk-free rate is 6%, and the firm's tax rate is 40%, what is University's weighted-average cost of capital? (LO3)

18. Project Discount Rate. University Products is evaluating a new venture into home computer systems (see Practice Problems 16 and 17). The internal rate of return on the new venture is estimated at 13.4%. WACCs of firms in the personal computer industry tend to average around 14%. Should the new project be pursued? Will University Products make the correct decision if it discounts cash flows on the proposed venture at the firm's WACC?

View Full Posting Details