2. Thor Industries finances its projects with 40% debts, 10% preferred stock and 50% common stock • The company can issue bonds at a yield to maturity of 8.4% The cost of preferred stock is 9% The risk free rate premium is 6.5%; market risk premium is 5% Beta is equal to 1.3 and company's tax rate is 30% • • Assume that the firm will be able to use retained earnings to fund the equity portion of its capital budget What is the company's weighted average cost of capital?

2. Thor Industries finances its projects with 40% debts, 10% preferred stock and 50% common stock • The company can issue bonds at a yield to maturity of 8.4% The cost of preferred stock is 9% The risk free rate premium is 6.5%; market risk premium is 5% Beta is equal to 1.3 and company's tax rate is 30% • • Assume that the firm will be able to use retained earnings to fund the equity portion of its capital budget What is the company's weighted average cost of capital?

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter17: Multinational Capital Structure And Cost Of Capital

Section: Chapter Questions

Problem 14QA

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Hasting Corporation is interested in acquiring Vandell Corporation. Vandell has 1.5 million shares outstanding and a target capital structure consisting of 30% debt; its beta is 1.4 (given its target capital structure). Vandell has $10.19 million in debt that trades at par and pays an 8% interest rate. Vandell’s current free cash flow (FCF0) is $2 million per year and is expected to grow at a constant rate of 5% a year. Vandell pays a 25% combined federal-plus-state tax rate, the same rate paid by Hastings. The risk-free rate of interest is 5%, and the market risk premium is 6%. Hasting’s first step is to estimate the current intrinsic value of Vandell. What is Vandell’s cost of equity? What is its weighted average cost of capital? What is Vandell’s intrinsic value of operations? (Hint: Use the free cash flow corporate valuation model from Chapter 7.) Based on this analysis, what is the minimum stock price that Vandell’s shareholders should accept?
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