Refer to problem 18. Suppose Big Oil borrows an additional $200 million from the bank, paying 12.6 percent interest. It then pays out a special $200 million dividend, leaving its assets and operations unchanged. What happens to Big Oil's WACC, still assuming it pays no taxes? What happens to the cost of equity?
What does a company's cost of capital represent and how is it calculated? How do market rates and the company's perceived market risk impact its cost of capital, and how does the company's debt to equity mix impact this cost of capital? You are leading the review of these elements in a meeting with managers and accountants.
Project 1- cost-$2,000 Rate of Return 16.00% project 2- cost-$3,000 Rate of Return 15.00% project 3- cost-$5,000 Rate of Return 13.75 % project 4- cost-$2,000 Rate of Return 12.50% The company estimates that it can issue debt at a before tax cost of 10 percent, and its tax rate is 30 percent.
Draco Paints makes an environmentally sound paint. The following data are available for the month of April: Percentage Units Complete Costs Beginning WIP inventory, April ............................ 11,000 Direct materials................................................ 75% $ 3,200 Conversion costs .......................
WEIGHTED AVERAGE COST OF CAPITAL If Wild Widgets, Inc., (WWI) were an all-equity firm, it would have a beta of 0.9.WWI has a target debt-to-equity ratio of 0.50. The expected return on the market portfolio is 16 percent, and Treasury bills currently yield 8 percent per annum. WWI one-year,$1,000 par value bonds carry a 7 perc
What is the weighted-average cost of capital for the company's assets and operations if the company does not pay any taxes?
A long-term bond has been issued with a market value of $50 million and an expected return of 9%. The company has 4 million shares outstanding trading for $10 each. At this price the shares offer an expected return of 17%. What is the weighted-average cost of capital for the company's assets and operations if the company does
How to compute weighted average number of common shares outstanding to be reported on comparative statements. How to compute the basic earnings per share to be reported on comparative statements.
3. What is the percentage total return on a stock that had an initial price of $70 per share, paid a dividend of $2.50 per share for the year, and had an ending price for the year of $74.50? 5. What is the expected rate of return on a portfolio where 20% is invested in Stock X, 30% in Stock Y, and 50% in Stock Z if
1. Finegan Services Ltd. has the following year end balance: ($000) Cash $1,000 A/P $500 A/R 3,500 Accruals 2,000 Inventory 10,000 Long-Term Debt 15,000 Net Fixed Assets 23,000 Common Equity 20,000 Total Assets $37,500 Total Liabilities $37,500 FSL's fixed assets are currently being used at
Tundra Corporation is interested in acquiring Tantrell Corporation. Tantrell has 2 million shares outstanding and a target capital structure consisting of 40 percent debt. The debt interest rate is 8 percent. Assume that the risk-free rate of interest is 3 percent and the market risk premium is 7 percent. Tantrell's fr
A Company finances its projects with 40% debt, 10% preferred stock, and 50% common stock. - The company can issue bonds at a YTM of 8.4%. - The cost of preferred stock is 9%. - The risk-free rate is 6.57%. - The market risk premium is 5%. - Johnson Industries' beta is equal to 1.3. - Assume that the firm will be able to
If a company finances its projects with 40 percent debt, 10 percent preferred stock, and 50 percent common stock. 1) The company can issue bonds at a yield to maturity of 8.4 percent. 2) The cost of preferred stock is 9 percent. 3) The company's common stock currently sells for $30 a sh
Total assets $3,000 million Tax rate 40% Operating income (EBIT) $800 million Debt ratio 0% Interest expense $0 million WACC 10% Net income $480 million M/B ratio 1.00x Share price $32.00 EPS = DPS $3.20 The company has no growth opportunities (g = 0), so the company pays out all of its earnings as dividends (EPS
Production Cost Report - Weighted Average Method. Problem 8.42 Nader Paints makes an environmentally sound paint. The following data are available for the month of April: Beginning WIP inventory, April Direct materials Conversion costs Units started in April Costs incurred in April: Direct materials Conversion
What kind of recommendation would you give for determining the costs of capital?
Exercise 4-8 - Equivalent Units and Cost per Equivalent Unit - Weighted-Average Method (L02, L04) Solex Company produces a high-quality insulation material that passes through two production processes. A quantity schedule for June for the first process follows: Quantity Schedule Units to be accounted for: Work
The following tabulation gives earnings per share figures for the Knerr Company during the preceding 10 years. The firm's common stock, 7.8 million shares outstanding, is now (1/1/2003) selling for $65 per share and the expected dividend at the end of the current year (2003) is 55 percent of the 2002 EPS. Because investors expec
Factors that should determine the appropriate required return on this investment opportunity in China.
China is fast becoming a manufacturing superpower. High-tech companies, such as computer chip manufacturers, and low-tech companies, such as textile manufacturers, have built manufacturing facilities in China. Assume that you are CFO of an automobile manufacturer looking to build a $400 million (U.S.) plant in China. Discuss the
You have been given the following projections for Moon Corporation for the coming year. Sales = 10,000 units Sales price per unit = $10 Variable cost per unit = $5 Fixed costs = $10,000 Bonds outstanding = $15,000 rd on outstanding bonds = 8% Tax rate = 40% Sha
A few problems related to business finance. Problem Set 3: Ross: Chapter 3 - Problems: 3.2, 3.4 3.2 Cheryl Colby, the CFO of Charming Florist Ltd., has created the firm's pro forma balance sheet for the next fiscal year. Sales are projected to grow at 10 percent to the level of $330 million. Current assets, fixed assets,
1. In March 2004, Fly Paper's stock sold for about $73. Security analysts were forecasting a long-term earnings growth rate of 8.5 percent. The company is expected to pay a dividend of $1.68 per share a. Assume dividends are expected to grow along with earnings at g 8.5 percent per year in perpetuity. What rate of return r wer
WACC or weighted average cost calculation 20. Carr Auto Parts is trying to calculate its cost of capital for use in a capital budgeting decision. Mr. Horn, the vice-president of finance, has given you the following information and has asked you to compute the weighted average cost of capital. The company currently has outsta
Please show formulas and solution on how to complete this one. Thanks A company's balance sheets show a total of $30 million long-term debt with a coupon rate of 9 percent. The yield to maturity on this debt is 11.11 percent, and the debt has a total current market value of $25 million. The balance sheets also show th
Alpha Signmaking, the leading producer of laminated sign making equipment, spent 2 years and $3 million dollars developing a new semiautomatic signmaker. In 1988, the company was ready to make a decision about placing the new signmaker into production. This signmaker would fill the gap between a manual unit selling for $1,000
What is the relationship between hurdle rate and Weighted Average Cost of Capital (WACC)? Which type of risk is more difficult to minimize: systematic or unsystematic? Why? Given the choice, being a small business owner, having experienced success in the local market, and wishing to expand company operations on a greater s
On January 1, the total market value of the Tysseland Company was $60 million. During the year, the company plans to raise and invest $30 million in new projects. The firm's present market value capital structure, shown below, is considered to be optimal. Assume that there is no short-term debt. Debt $30,00
Calculate the WACC for a firm with a debt-equity ratio of 1.5. The debt pays 6% interest and the equity is expected to return 8%. Assume a 35% tax rate and risk-free debt.
The CEO needs you to calculate the company's weighted-average cost of capital (WACC). In addition to calculating the WACC, the CEO wants you to explain how the capital structure would need to change if the firm wanted to reduce its cost of capital. The CEO believes the company needs a split of 25% debt to 75% equity to have an o
Elliott Athletics is trying to determine its optimal capital structure, which now consists of only debt and common equity. The firm does not currently use preferred stock in its capital structure, and it does not plan to do so in the future. To estimate how much its debt would cost at different debt levels, the company's treasur
12. The Horizon Company will invest $60,000 in a temporary project that will generate the following cash inflows for the next three years. Year Cash Flow 1. . . . . . . . . $15,000 2. . . . . . . . . 25,000 3. . . . . . . . . 40,000 The firm will also be required to spend $10,000 to close down the project at the end o