Crypton Electronics has a capital structure consisting of 40% common
stock and 60% debt. A debt issue of $1000 par value, 50% bonds that
mature in 15 years and pay annual interest will sell for $975. Common
Stock of the firm is currently selling for $30.83 per share and the firm
expects to pay a $2.28 dividend next year. Dividends have grown at the
rate of 4.7% per year and are expected to continue to do so for the
foreseeable future. What is Crypton’s cost of capital where the the
firm’s tax rate is 30%?
Crpton’s cost of capital is _______%. (round to three decimal places.)
2.
(WACC) The target capital sturctue for Jowers Manufacturing is 45%
common stock, 11% preferred stock, and 44% debt. If the cost of common
equity for the firm is 19.5%, the cost of preferred stock is 11.9%, and
the beforetax cost of debt is 10.4%, what is Jowers’ cost of capital?
The firm’s tax rate is 34%.
Jowers’ WACC is ______%. (Round to three decimal places.)
3.
(WACC) As a member of the Finance Department of Ranch Manufacturing,
your supervisor has asked you to compute the appropriate disxount rate
to use when evaluating the purchase of new packaging equipment for the
plant. Under the assumption that the firm’s present capital structure
reflects the appropriate mix of capital sources for the firm, you have
determined the market value of the firm’s capital structure as follws:
Source of Capital Market Values
Bonds $4,500,000
Preferred stock $2,100,000
Common Stock $6,200,000
4.
(EBIT-EPS analysis) Abe Forrester and three of his friends from college
have interested a group of venture capitalists in backing their
business idea. The proposed operation would consist of a series of
retail otlets to distribute and service a full line of vacuum cleaners
and accessories. Theese stores would be located in Dallas, Houston, and
San Antonio. To finace the new venture two plans have been propsed:
-plan A is an all-common-equity strucre in which $2.1 million dollars would be raised by selling 82,000 shares of common stock.
-Plan
B would nvolve issuing $1.4 million dollars in long-term bonds wit an
effective interest rate of 12.4% plus $0.7 million wold be raised by
selling 41,000 shares of common stock. The debt fnds raised under Plan B
have no fixed maturity date, in that this amount of financial leverage
is considered a permanent part of the firm’s capital structure.
Abe
and his partners plan to use a 38% tax rate in their analysis, and they
have hired you on a consulting basis to do the following:
A. Find the EBIT indifference level associated with the two financing plans.
B.
Prepare a pro forma income statement for the EBIT level solved for in
Part a. that shows that EPS will be the same regardless whether Plan A
or B is chosen.
a. Find the EBIT indifference level associated with the two financing plans is $________. (round to the nearest dollar.)
b.
Prepare a pro forma income statement for the EBIT level solved for in
part a. that shows that EPS will be the same regardless whether Plan A
or B is chosen.
Complete the segment of the income statement for
Plan A below: (round income statement amounts to the nearest dollar
except the EPS to the nearest cent.)
Stock Plan
EBIT $____________
Less: Interest expense ____________
Earnings before taxes ______________
Less: Taxes at 38% _____________
Net Income ____________
Number of Common Shares ____________
EPS ____________
Complete
the segment of the income statement for Plan B below: (round income
statement amounts to the nearest dollar except the EPS to the nearest
cent.)
Bond/Stock Plan
EBIT $____________
Less: Interest Expense ____________
Earnings Before Taxes ____________
Less: Taxes at 38% ____________
Net Income ____________
Number of common shares ____________
EPS _____________
