Investment Chapter 11 Answer

* She is considering the cash flow paid to all the equity or debt holders. So she cannot use the equity cost of capital.

Star Corporation issued both common and preferred stock during 20X6. The stockholders' equity sections of the company's balance sheets at the end of 20X6 and 20X5 follow.

The 8 percent pre-tax estimate is the nominal cost of debt. Because the firm's debt has semiannual coupons, its effective annual cost rate is 8.16 percent

10. What is the correct capital structure and weighted average cost of capital for discounting the investment’s free cash flow. Assume a 35% tax rate. A correct response requires that you define capital structure and Weighted Average Cost of Capital (WACC) with a formula. When defining a term with a formula be sure that all the variables are also defined.

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

WACC= (%of debt) (after-tax cost of debt) + (% of preferred stock)(Cost of preferred stock) + (% of common equity) (Cost of common equity)

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

We assume that Telus maintains a fixed debt to equity ratio and hence, the calculation will include preferred shares. 5.00 percent of cost in the past cannot be used towards final calculation

- The Bet-r-Bilt Company has a 5-year bond outstanding with a 4.30 percent coupon. Interest payments are paid semi-annually. The face amount of the bond is $1,000. This bond is currently selling for 93 percent of its face value. What is the company's pre-tax cost of debt?

d. How valid in an estimate of the cost of debt based on 15 year bonds if the corporation normally issue 30 year long term debt? The estimate is not exactly valid because coupon rates differ for 15- and 30-year bonds. Generally, the cost of debt is higher for bonds with longer time to maturity. It has to do with risk. The longer

The tax rate is estimated from case Exhibit 2 as Income Taxes ($496 million) divided by Earnings Before Taxes, Non-controlling Interest and Goodwill Amortization ($990 million). Note that, in 2001, interest on the company’s total debt is approximately 3.8%: $317 million of interest / $8,361 million of debt. However, this calculation is misleading since the 2000 debt is much larger than the 1999 debt of $2,270 (not in the case). You should ask yourself…should you use current yields or historical yields when calculating the cost of debt? Current yield figures should be used because Telus is considering

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

Nearly There designs, develops, manufactures and sells various navigation products and services. They are a public company registered with the SEC and their common stock trades on the stock exchange. The Company is well capitalized with a $100 million market capitalization for its common stock. Due to R&D expenses and slumping sales, Nearly There is in the need of additional capital. The Company's solution was to issue 5 million shares of Series B preferred stock at $1.20 per share. The proceeds received by the company totaled $5.9 million. The important terms of the Series B preferred stock included dividends, voting rights, conversion options, conversion price adjustment,

Thus the WAVG Cost of Debt (including L/T debt and preferred stock) = rd = 8.633%

The market value of debt was calculated using the existing yield of maturity on a 5 yar bond issued on a private placement basis on July 1, 2000. With the coupon of 5.75% and the discount price of 97, YTM for this bond is 6.62%. With a discount price being 97, the market value of debt is 17,654M.