Problem 11.3 Seattle Scientific, Inc. Josh Miller is chief financial officer of a medium-sized Seattle-based medical device manufacturer. The company's annual sales of $40 million have been growing rapidly, and working capital financing is a common source of concern. He has recently been approached by one of his major Ja
Piscataqua River Company has a 3 to 5, debt to equity ratio. The beta of its equity security is 1.75, while the overall market beta is one and overall market return for the year has been 12.15% (S&P 500). Piscataqua pays its own bond holders an overall marginal debt interest of $67.50 per year, while investing in short-term, ris
1) Point-estimate exchange rate forecasts cannot adequately account for the potential impact of exchange rate fluctuations True or False 2) Country risk can be used: I. to monitor countries where the MNC is presently doing business. II. as a screening device to avoid conducting business in countries with excessive risk.
A firm has a corporate tax rate of 35%, a cost of debt of 8.25%, with a 15% cost on its equity capital. There is $15,000,000 in debt and $25,000,000 in equity in its capital structure. What is the weighted average cost of capital of this firm? The same firm as in question 4 above changes its capital structure to reflect a 50/
The Super Muench Cookie Company has a capital structure consisting of 30% debt and 70% equity based on market values. Company's equity beta based on its current level o debt financing is 1.8 and its debt beta is 0.6. Also, the risk free rate of interest is currently 3% on long-term government bonds. The company's pre-tax cost of
The Nantucket Nugget is unlevered and is valued at $640,000. Nantucket is currently deciding whether including debt in their capital structure would increase their value. The current cost of equity is 12%. Under consideration is issuing $300,000 in new debt (perpetuity) with an 8% interest rate. Nantucket would repurchase $300,0
A corporation is unlevered and is valued at $640,000. The corporation is currently deciding whether including debt in its capital structure would increase its value. The current of cost of equity is 12%. Under consideration is issuing $300,000 in new debt with an 8% interest rate. The corporation would repurchase $300,000 of sto
See attached files. Google is the target company using a two-year financial analysis, need to calculate the WACC for 2008 and 2009. Attached are the financial reports for 2008 and 2009 and relevant links. Investor relations http://investor.google.com/financial/2008/filings-archives.html Quarterly Earnings http://
When interest rates in the general market place fall below what a bond's original issued coupon payment was: a) the price of the bond remains the same, but the interest payments are lowered to adjust for the fall in rates. b) the price of the bond falls, and interest payments of the bond are lowered to adjust for the fall i
Nathan's Catering is a gourmet catering service located in Southampton, New York. It has an unleveraged required return of r=43%. Nathan's rebalances its capital structure each year to a target of L=0.52. T*=0.20. Nathan's can borrow currently at a rate of rd=26%. What is Nathan's WACC? Please provide step by step instructio
Jingle Bell is 60% debt-financed and the expected return on its debt is 6%. Its equity beta is 2. Risk-free rate of return is 4% and market risk premium is 4%. Assume Jingle Bell operates in a MM world with no taxes. a) What is Jingle Bell's WACC? b) An investor has invested all her savings (â?¬10,000) in bell product
Ottawa Manufacturing produces a plastic toy in a two-stage molding and finishing operation. The company uses the weighted-average method of process costing. During June, the following data were recorded for the Finishing Department: Units of beginning Inventory 10,000 Percentage completion of
1. Compute Maple Leaf's weighted-average cost of capital (WACC). 2. Compute the economic value added (or EVA) for each of the company's three divisions. 3. What conclusions can you draw from the EVA analysis?
Maple Leaf Industries, headquartered in Toronto, is a multiproduct company with three divisions: Pacific Division, Plains Division, and Atlantic Division. The company has two sources of long-term capital: debt and equity. The interest rate on Maple Leafâ??s $400 million debt is 9 percent, and the companyâ??s tax rate is 30
After-Tax Cost of Debt Cost of Preferred Stock with Flotation Costs Cost of Equity: DCF Bond Yield and After- Tax Cost of Debt What would your estimate be for the divisions cost of capital What are three types of project risk? How is each type of risk used? Explain in words why new common stock that is raised externally has a higher percentage cost than equity that is raised internally by reinvesting earnings. o. (1) Harry Davis estimates that if it issues new common stock, the flotation cost will be 15%. Harry Davis incorporates the flotation costs into the DCF approach. What is the estimated cost of newly issued common stock, taking into account the flotation cost? (2) Suppose Harry Davis issues 30- year debt with a par value of $ 1,000 and a coupon rate of 10%, paid annually. If flotation costs are 2%, what is the after- tax cost of debt for the new bond issue? p. What four common mistakes in estimating the WACC should Harry Davis avoid?
See attached file. After-Tax Cost of Debt Calculate the after- tax cost of debt under each of the following conditions: a. Interest rate, 13%; tax rate, 0%. b. Interest rate, 13%; tax rate, 20%. c. Interest rate, 13%; tax rate, 35%. (10-2) After-Tax Cost of Debt LL Incorporated's currently outstanding 11% coupon b
The effect of tax rate on WACC. Equity Lighting Corp. wishes to explore the effect on its cost of capital of the rate at which the company pays taxes. The firm wishes to maintain a capital structure of 30% debt, 15% preferred stock, and 55% common stock. The cost of financing with retained earnings is 17%, the cost of preferred
Shi Importers' balance sheet shows $300 million in debt, $50 million in preferred stock, and $250 million in total common equity. Shi faces a 40% tax rate and the following data: rd 6%, rps 5.8%, and rs 12%. If Shi has a target capital structure of 30% debt, 5% preferred stock, and 65% common stock, what is Shi's WACC?
Company has a target capital structure of 40% debt, 10% preferred stock, and 50% common equity. The company's after tax cost of debt is 8%, its cost of preferred debt is 10%, its cost of retained earnings is 14%, and its cost of new common stock is 16%. The company stock has a beta of 1.2 and the company's marginal tax rate is 3
This Company has a target capital structure of 40% debt, 10% preferred stock, and 50% common equity. The company's after tax cost of debt is 8%, its cost of preferred debt is 10%, its cost of retained earnings is 14%, and its cost of new common stock is 16%. The company stock has a beta of 1.2 and the company's marginal tax rate
The Chang Company is considering the purchase of a new machine to replace an obsolete one. The machine being used for the operation has a book value and a market value of zero. However, the machine is in good working order and will last at least another 10 years. The proposed replacement machine will perform the operation so
A company has determined that its optimal capital structure consists of 30 percent debt and 70 percent equity. Given the following information, calculate the firm's weighted average cost of capital. Rd = 6% Tax rate = 35% P0 = $35 Growth = 0% D0 = $3.00
Hettenhouse Company's perpetual preferred stock sells for $102.50 per share, and it pays a $9.50 annual dividend. If the company were to sell a new preferred issue, it would incur a flotation cost of 4.00% of the price paid by investors. What is the company's cost of preferred stock for use in calculating the WACC?
Richardson Electronics has issued long-term bonds with a total market value of $50 million, and these bonds currently earn an expected return (rd) of 9 percent. Additionally, Richardson has 4 million shares of common stock outstanding, with each share trading for $10 (P0 = $10). At this price per share the stocks offer an
Recall the determined the cost of capital for Rondo. Rondo's cost of capital is the appropriate discount rate for evaluating company investment projects and we applied it to evaluating Option 1. Now I introduce a twist. When evaluating an acquisition, the appropriate discount rate is not the acquirer's cost of capital but rather
Use the appropriate MM model to evaluate the following: an unlevered firm (Firm U) has a market value of $45 million, a tax rate of 40%, and expected EBIT of $9 million. A levered firm (Firm L) is identical to Firm U (same tax rate, same EBIT) except Firm L has outstanding 8% debt of $18 million. The weighted average
1. What are some of the reasons that the cost of capital differs from country to country? What are the drivers behind this? 2. What is the significance of the WACC and how is it used to determine a firm's value? How will the differences in corporate taxes between countries affect the WACC? What is the affect of the curren
Wilsons Landscaping has 1,200 bonds outstanding that are selling for $990 each. The company also has 2500 shares of preferred stock at a market price of $28. per share. The common stock is priced at $37. a share and there are 28,000 shares outstanding. What is the weight of the common stock as it related to th firms weighted avg
10. Thompson Stores is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's projected IRR can be less than the WACC (and even negative), in which case it will be rejected. Year Cash Flow 0 ($1,000) 1
You work for Smith Company as a consultant. Kroncke target capital structure is 30% debt, 20% preferred, and 50% common equity. The after-tax cost of debt is 8%, the cost of preferred is 6.5%, and the cost of retained earnings is 13.25%. the firm will not be issuing any new stock. What is its WACC? a. 10.07% b. 10.
2. Assume a project has normal cash flows. All else equal, which of the following statements is correct? a. The project's IRR increases as the WACC declines. b. The project's NPV increases as the WACC declines. c. The project's MIRR is unaffected by changes in the WACC d. The project's
Jake's Sound Systems has 210,000 shares of common stock outstanding at a market price of $36 a share. Last month, Jake's paid an annual dividend in the amount of $1.593 per share. The dividend growth rate is 4%. Jake's also has 6,000 bonds outstanding with a face value of $1,000 per bond. The bonds carry a 7 % coupon, pay intere