Finance and Par Value

2445 Words Sep 18th, 2013 10 Pages
Chapter 14

1. Templeton Extended Care Facilities, Inc. is considering the acquisition of a chain of cemeteries for $410 million. Since the primary asset of this business is real estate, Templeton’s management has determined that they will be able to borrow the majority of the money needed to buy the business. The current owners have no debt financing but Templeton plans to borrow $320 million and invest only $90 million in equity in the acquisition. What weights should Templeton use in computing the WACC for this acquisition? 2. In August of 2009 the capital structure of the Emerson Electric Corporation (EMR) (measure in book and market values) appeared as follows:
Thousands of dollars Book Values Market values
Short- term debt
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The dividends are expected to grow at a rate of 5.8% per year into the foreseeable future. The price of this stock is now $25.18. c. A bond that has a $1,000 par value and a coupon interest rate of 12.7%. A new issue would sell for $1,150 per bond and mature in 20 years. The firm’s tax rate is 34%. d. A preferred stock paying a 7.2% dividend on a $93 par value. If a new issue is offered, the shares would sell for $85.32 per share. 7. Salte Corporation is issuing new common stock at a market price of $27.24. Dividends last year were $1.47 and are expected to grow at an annual rate of 5.7% forever. What is Salte’s cost of common equity? 8. Falon Corporation is issuing new common stock at a market price of $27.04. Dividends last year were $1.34 and are expected to grow at an annual rate of 7.3% forever. What is Falon’s cost of common equity capital? 9. Temple-Midland, Inc. is issuing a $1,000 par value bond that pays 7.8% annual interest and matures in 15 years. Investors are willing to pay $953 for the bond and Temple faces a tax rate of 34%. What is Temple’s after-tax cost of debt on the bond? 10. Belton Distribution Company is issuing a $1,000 par value bond that pays 7.4% annual interest and matures in 15 years. Investors are willing to pay $958 for the bond. The company is in the 18 percent marginal tax bracket. What is the firm’s after-tax cost of debt on the bond? 11. The preferred stock of Walter Industries Inc.

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