Fin 571 Week 4 Connect Problems

Capital Structure. Boston Beer Company is financed almost entirely by shareholder’s equity. The company only had one note payable which was set in June 2012. The note payable is a grant to improve road traffic of the company’s Pennsylvania Brewery. As of December 27, 2014, the total debt, including notes payable, current portion of long-term debt, and long-term debt, was $583,000. According to the company’s balance sheet, as of the end of fiscal year 2014, there were 13,069,730 shares of outstanding common stock, and the price of the stock was $295.74. Thus, the market value of shareholder’s equity was $3,865,241,950 (Boston Beer Co. Inc. and YCharts). The capital structure of Boston Beer is 0.015% debt and 99.985% equity.

Southlake Corporation issued $900,000 of 8% bonds on March 1, 20X1. The bonds pay interest on March 1 and September 1 and mature in 10 years. Assume the independent cases that follow.

Based on the suggestion that the focus should be on market values, compute the weights of debt, preferred stock, and common stock.

The cost of equity was found using CAPM, with the given market risk premium of 5%, a beta of .88, and risk-free rate of 4.03%. The beta was found by running a regression of Southwest’s percent change in stock price versus the S&P 500’s percent change in stock price for two years (June 28, 2000 to June 28, 2002). The risk-free rate was the return on a ten-year treasury note issued on June 28, 2002, according to the U.S. Treasury’s website. The tax rate of 39% was used to account for tax savings from leverage. In order to calculate the firm’s leverage, the market value of equity was found from the price per share on July 24, 2002 (Yahoo Finance) and the shares outstanding on the balance sheet of the July 10-Q report, as shown in Exhibit X. The debt value was approximated at the book value since data could not be found regarding its market value. This analysis resulted in a debt weight of 11.74% and equity weight of 88.26%. The final approximation for the weighted average cost of capital was 8.64%.

Its coupon rate is 8.3%. Its value at maturity is $1,000. It matures in 4 years. Its yield to maturity is currently 5.3%. The modified duration of this bond is ______ years.

d) Calculate the new value per share after the capital structure change. (Hint: use your answers to parts b and c.)

However, the Walgreens’ capital structure is similar to its stronger competitor CVS’ capital structure that I defined as the benchmark. CVS has a total liabilities and shareholders’ equity of $54,721.90, where total debt is $23,400 representing the 42.76% and total equity is $31,321.90 which represents 57.24%. Moreover, if we compare 2006 results to 2007, I realize that capital structure

-Martin Industries just paid an annual dividend of $1.30 a share. The market price of the stock is $36.80 and the growth rate is 6.0 percent. What is the firm's cost of equity?

WACC = Cost of Debt X proportion of debt + Cost of Preferred Stock X Proportion of preferred stock + Cost of equity X proportion of equity

The current enterprise value is $41,335 million and the equity value is $34,455 million. According to yahoo finance, the shares outstanding of our company are 647.31 million, so we can calculate the stock price for next year is $53.23. It will increase in following years.

14) Various Capital Structures Character Enterprises currently has $1.5 million in total assets and is totally equity financed. It is contemplating a change in its capital structure. Compute the amount of debt and equity that would be outstanding is the firm were to shift to each of the following debt ratios: 10%, 20%, 30%, 40%, 50%, 60%, and 90%.

Based on the readings of the Module, and upon reviewing total debt/equity ratios, company betas, profitability ratios, company revenue, assets, and liabilities, and the nature of the operations of the companies including the nature of their customers and products, what would you recommend should the capital structure (total liabilities or debt and equity proportions) be for each of the three companies?

Market value proportions of: Debt = $1,147,200 / $4,897,200 = 23.4% Pref. Share = $1,250,000 / $4,897,200 = 25.5% Common equity = $2,500,000 / $4,897,200 = 51.1%

If company doesn’t have any debt, it means that WACC is equal to cost of equity.

a) Weighting of Capital Structure: Use of book values of capital rather than the market values