(Cost of debt) Sincere Stationery Corporation needs to raise $543,000 to improve its manufacturing plant. It has decided to issue a $1,000 par value bond with an annual coupon rate of 10.9 percent with interest paid semiannually and a10-year maturity. Investors require a rate of return of 7.7 percent.a. Compute the market value of the bonds.b. How many bonds will the firm have to issue to receive the needed funds?c. What is the firm's after-tax cost of debt if the firm's tax rate is 34 percent?a. The market value of the bonds is $(Round to the nearest cent.)

In this question we have three parts: In part (A) we need to compute the market value i.e. present…

Answered: (Cost of debt) Sincere Stationery…

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter11: Determining The Cost Of Capital

Section: Chapter Questions

Problem 14P

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The following table gives the current balance sheet for Travellers Inn Inc. (TII), a company that was formed by merging a number of regional motel chains. Travellers Inn (Millions of Dollars) The following facts also apply to TII. (1) The long-term debt consists of 29,412 bonds, each having a 20-year maturity, semiannual payments, a coupon rate of 7.6%, and a face value of 1,000. Currently, these bonds provide investors with a yield to maturity of 11.8%. If new bonds were sold, they would have an 11.8% yield to maturity. (2) TIIs perpetual preferred stock has a 100 par value, pays a quarterly dividend per share of 2, and has a yield to investors of 10%. New perpetual preferred stock would have to provide the same yield to investors, and the company would incur a 3.85% flotation cost to sell it. (3) The company has 3.8 million shares of common stock outstanding, a price per share = P0 = 20, dividend per share = D0 = 1, and earnings per share = EPS0 = 5. The return on equity (ROE) is expected to be 10%. (4) The stock has a beta of 1.6%. The T-bond rate is 6%, and RPM is estimated to be 5%. (5) TIIs financial vice president recently polled some pension fund investment managers who hold TIIs securities regarding what minimum rate of return on TIIs common would make them willing to buy the common rather than TII bonds, given that the bonds yielded 11.8%. The responses suggested a risk premium over TII bonds of 3 percentage points. (6) TII is in the 25% federal-plus-state tax bracket. Assume that you were recently hired by TII as a financial analyst and that your boss, the treasurer, has asked you to estimate the companys WACC under the assumption that no new equity will be issued. Your cost of capital should be appropriate for use in evaluating projects that are in the same risk class as the assets TII now operates. Based on your analysis, answer the following questions. a. What are the current market value weights for debt, preferred stock, and common stock? (Hint: Do your work in dollars, not millions of dollars. When you calculate the market values of debt and preferred stock, be sure to round the market price per bond and the market price per share of preferred to the nearest penny.) b. What is the after-tax cost of debt? c. What is the cost of preferred stock? d. What is the required return on common stock using CAPM? e. Use the retention growth equation to estimate the expected growth rate. Then use the expected growth rate and the dividend growth model to estimate the required return on common stock. f. What is the required return on common stock using the own-bond-yield-plus-judgmental-risk-premium approach? g. Use the required return on stock from the CAPM model, and calculate the WACC.
Sincere Stationary Corporation needs to raise $500,000 to improve its manufacturing plant. It has decided to issue a $1,000 par value bond with an annual coupon rate 10.0 percent with interest paid semiannually and a 10-year maturity. Investors require a return of 9.0 percent. A. Compute the market value of the bonds B. How many bonds will the firm have to issue to receive the needed funds C. What is the firms after-tax cost of debt if the firms tax rate is 34 percent
ABC company will contract a new loan in the sum of $2,000,000 that is secured by machinery and the loan has an interest rate of 6 percent. The company has also issued 4,000 new bond issues with an 8 percent coupon, paid semi-annually, and matures in 10 years. The bonds were sold at par and incurred a floatation cost of 2 percent per issue. 1. Does the New loan have anything to do with calculating the cost of debt? 2. Should the new loan be considered in the calculation of the weighted average cost of capital (WACC) of the company? if so how should it be added to the WACC formula.

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