Bonakid Inc. has decided to invest P10,000,000 in a new headquarters and needs to determine the best way to finance the construction. The firm currently has P50,000,000 of 10% bonds and 4,000,000 common shares outstanding. The firm can obtain the P10,000,000 of financing through a 10% bond issue or the sale of 1,000,00O shares of common stock. The firm has a 40 percent tax rate. What is the degree of financial leverage for Bond Issue plan at P25,000,000 of EBIT? (answer
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- Cybernauts, Ltd., is a new firm that wishes to determine an appropriate capital structure. It can issue 16 percent debt or 15 percent preferred stock. The total capitalization of the company will be $5 million, and common stock can be sold at $20 per share. The company is expected to have a 50 percent tax rate (federal plus state). Four possible capital structures being considered are as follows: PLAN DEBT PREFERRED EQUITY 1 0% 0% 100% 2 30 0 70 3 50 0 50 4 50 20 30 a. Construct an EBIT - EPS chart for the four plans. (EBIT is expected to be $1 million.) Be sure to identify the relevant indifference points and determine the horizontal - axis intercepts. b. Which plan is best? Why?The Optical World Corporation, a manufacturerof peripheral vision storage systems, needs $10 million to market its new robotics-based vision systems.The firm is considering two financing options: common stock and bonds. If the firm decides to raise thecapital through issuing common stock, the flotationcosts will be 6%, and the share price will be $25. Ifthe firm decides to use debt financing, it can sell a10-year, 12% bond with a par value of $1,000. Thebond flotation costs will be 1.9%.(a) For equity financing, determine the flotationcosts and the number of shares to be sold to net$10 million.(b) For debt financing, determine the flotation costsand the number of $1,000 par value bonds tobe sold to net $10 million. What is the requiredannual interest payment?Twin City Publishing is considering two financial alternatives for financing a major expansion program. Under either alternative EBIT is expected to be $15.6 million. Currently the firm's capital structure consists of 4 million shares of common stock and $35 million in 11% long-term bonds. Under the debt financing alternative $10 million in 12% long-term bonds will be sold and under the equity financing alternative the firm would sell 500,000 shares of common stock. The P/E (Price-earnings ratio) under the debt alternative would be 15 and the P/E under the equity alternative would be 16. The firm's tax rate is 40%. Required: Which alternative would the firm choose? Show your workings and explain your findings.
- Mom's Motel Corporation (MM) plans to issue bonds to raise $175 million that it needs to support future operations. MM's investment banker will charge flotation costs of 2.5% of the total amount issued to help MM raise the funds. In addition, MM will incur other costs associated with the issue that equal $500,000. The market value of each bond at issue time will be $1,000. How many bonds must GM sell to net $175 million that it needs?HMK Enterprises would like to raise $10.0 million to invest in capital expenditures. The company plans to issue five-year bonds with a face value of $1,000 and a coupon rate of 6.59% (annual payments). The following table summarizes the yield to maturity for five-year (annual-payment) coupon corporate bonds of various ratings: Rating AAA AA A BBB BB YTM 6.19% 6.36% 6.59% 6.96% 7.54% a. Assuming the bonds will be rated AA, what will be the price of the bonds? b. How much of the total principal amount of these bonds must HMK issue to raise $10.0 million today, assuming the bonds are AA rated? (Because HMK cannot issue a fraction of a bond, assume that all fractions are rounded to the nearest whole number.) c. What must be the rating of the bonds for them to sell at par? d. Suppose that when the bonds are issued, the price of each bond is $961.60. What is the likely rating of the bonds? Are they junk bonds?New Beginnings has the following capital structure; 7% First Mortgage Bonds – $65,000,000 outstanding; 9% senior sub-ordinated Bonds – $40,000,000 outstanding; Class A preferred stock paying 4.5%, $18,000,000 outstanding; Class B preferred stock paying 6.5%, $20,000,000 outstanding; Common Equity $93,000,000 outstanding paying 13.5%. Its tax rate is 36%. a) What is New Beginnings WACC? b) New Beginnings is considering the issuance of $27,000,000 project financing bonds for an up-coming capital project. The bonds will be priced at 7.8%. What is New Beginnings WACC with the new issue?
- Zola Sdn Bhd wants to develop new product through research and development whichrequires additional financing of RM2 million. Zola Sdn Bhd is considering selling one security to raise the needed funds from the following options: i. To sell bonds at RM950,14 percent coupon rate with maturity of 15 years. The underwriting fee is 8 percent of market price. The tax rate for the company is 35 percent. ii. To sell preferred shares at RM85 with 9 percent dividend and RM5 for issuing cost. iii. To issue new common shares at RM23 per share and RM1.20 for floatation cost. The company has just paid RM0.80 in dividend and the earnings is expected to grow at 9 percent annually Calculate the after-tax cost of: i) Bond ii) Preferred shares iii) Common shares iv) Which source should the firm choose? Why? Please use YTM method to calculate the bond.Zola Sdn Bhd wants to develop new product through research and development whichrequires additional financing of RM2 million. Zola Sdn Bhd is considering selling one security to raise the needed funds from the following options: i. To sell bonds at RM950,14 percent coupon rate with maturity of 15 years. The underwriting fee is 8 percent of market price. The tax rate for the company is 35 percent. ii. To sell preferred shares at RM85 with 9 percent dividend and RM5 for issuing cost. iii. To issue new common shares at RM23 per share and RM1.20 for floatation cost. The company has just paid RM0.80 in dividend and the earnings is expected to grow at 9 percent annually Calculate the after-tax cost of: i) Bond ii) Preferred shares iii) Common shares iv) Which source should the firm choose? Why?Orion Corporation is discussing a new capital expenditure project that requires an investment of €100 million. In line with the target capital structure of Orion, the management of the company has prepared the following funding plan:- A 5-year zero-coupon bond with face value of €32 million, priced at 80% of its face value.- A 5-year coupon bond, with 4% annual coupons, face value of €26 million, priced at 95% of its face value. -Preferred shares with a total €18 million face value. The issue price is at €40 with a preferred coupon of 12%. The flotation expenses are 2% on the issue price.-The remaining financing needs will be covered from retained earnings. Currently, the stock of the company trades at €50, the last dividend payment was €2.5 per share, and the expected growth rate for dividends is 8 percent. In addition, the beta of the stock is 1.4, the risk-free rate is 4 percent, and the expected market risk premium is 8 percent. Questions:1. Estimate the WACC of Orion…
- DF Ltd wants to raise $20 million. The entity is planning to issue 15-year bonds to raise these funds in either a public issue or a private issue. Option 1: Public issue Coupon rate 10% DF Ltd also needs to pay an underwriting commission of 1% of the gross proceeds. Other preliminary costs: $250,000 Option 2: Private issue Coupon rate 9% Other issue cost of the private placement will be 1.2% of the gross proceeds. Other preliminary costs: $250,000 The bonds will be issued at par and the principal will not be repaid until the maturity date. Assuming a discount rate of 12%, which alternative should the company choose?The Maximus Corporation is considering a new investment, which would be financed from debt. Maximus could sell new $1,000 par value bonds at a new price of $920. The bonds would mature in 13 years, and the coupon interest rate is 10%. Compute the after-tax cost of capital to Maximus for bonds, assuming a 34% tax rate. Show work.Pardon Me, Inc., recently issued new securities to finance a new TV show. The project cost $14.7 million, and the company paid $795,000 in flotation costs. In addition, the equity issued had a flotation cost of 7.7 percent of the amount raised, whereas the debt issued had a flotation cost of 3.7 percent of the amount raised. If the company issued new securities in the same proportion as its target capital structure, what is the company’s target debt−equity ratio?
