Delta Corporation has the following capital structure: Debt (K) Preferred stock (Kp) Common equity (Ke) (retained earnings) Weighted average cost of capital (Kg) Capital structure size (X) Cost (aftertax) 6.6% 11.2 11.2 million Weights 20% 10 70 Weighted Cost a. If the firm has $49 million in retained earnings, at what size capital structure will the firm run out of retained earnings? Note: Enter your answer in millions of dollars (e.g., $10 million should be entered as "10" 4 1.32% 1.12 7.84 10.28% b. The 6.6 percent cost of debt referred to earlier applies only to the first $23 million of debt. After that the cost of debt will go up. At what size capital structure will there be a change in the cost of debt? Note: Enter your answer in millions of dollars (e.g.. $10 million should be entered as "10"

Delta Corporation has the following capital structure: Debt (K) Preferred stock (Kp) Common equity (Ke) (retained earnings) Weighted average cost of capital (Kg) Capital structure size (X) Cost (aftertax) 6.6% 11.2 11.2 million Weights 20% 10 70 Weighted Cost a. If the firm has $49 million in retained earnings, at what size capital structure will the firm run out of retained earnings? Note: Enter your answer in millions of dollars (e.g., $10 million should be entered as "10" 4 1.32% 1.12 7.84 10.28% b. The 6.6 percent cost of debt referred to earlier applies only to the first $23 million of debt. After that the cost of debt will go up. At what size capital structure will there be a change in the cost of debt? Note: Enter your answer in millions of dollars (e.g.. $10 million should be entered as "10"

EBK CFIN

6th Edition

ISBN:9781337671743

Author:BESLEY

Publisher:BESLEY

Chapter12: Capital Structure

Section: Chapter Questions

Problem 8PROB

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As a first step, we need to estimate what percentage of MMMs capital comes from debt, preferred stock, and common equity. This information can be found on the firms latest annual balance sheet. (As of year end 2014, MMM had no preferred stock.) Total debt includes all interest-bearing debt and is the sum of short-term debt and long-term debt. a. Recall that the weights used in the WACC are based on the companys target capital structure. If we assume that the company wants to maintain the same mix of capital that it currently has on its balance sheet, what weights should you use to estimate the WACC for MMM? b. Find MMMs market capitalization, which is the market value of its common equity. Using the sum of its short-term debt and long-term debt from the balance sheet (we assume that the market value of its debt equals its book value) and its market capitalization, recalculate the firms debt and common equity weights to be used in the WACC equation. These weights are approximations of market-value weights. Be sure not to include accruals in the debt calculation.
Assume Plainfield Manufacturing has debt of $6,500,000 with a cost of capital of 9.5% and equity of $4,500,000 with a cost of capital of 11.5%. What is Tylers weighted average cost of capital?
The Rivoli Company has no debt outstanding, and its financial position is given by the following data: What is Rivoli’s intrinsic value of operations (i.e., its unlevered value)? What is its intrinsic stock price? Its earnings per share? Rivoli is considering selling bonds and simultaneously repurchasing some of its stock. If it moves to a capital structure with 30% debt based on market values, its cost of equity, rs, will increase to 12% to reflect the increased risk. Bonds can be sold at a cost, rd, of 7%. Based on the new capital structure, what is the new weighted average cost of capital? What is the levered value of the firm? What is the amount of debt? Based on the new capital structure, what is the new stock price? What is the remaining number of shares? What is the new earnings per share?
Assume Skyler Industries has debt of $4,500,000 with a cost of capital of 7.5% and equity of $5,500,000 with a cost of capital of 10.5%. What is Skylers weighted average cost of capital?
Suppose IWT has decided to distribute $50 million, which it presently is holding in liquid short-term investments. IWT’s value of operations is estimated to be about $1,937.5 million; it has $387.5 million in debt and zero preferred stock. As mentioned previously, IWT has 100 million shares of stock outstanding. Assume that IWT has not yet made the distribution. What is IWT’s intrinsic value of equity? What is its intrinsic stock price per share? Now suppose that IWT has just made the $50 million distribution in the form of dividends. What is IWT’s intrinsic value of equity? What is its intrinsic stock price per share? Suppose instead that IWT has just made the $50 million distribution in the form of a stock repurchase. Now what is IWT’s intrinsic value of equity? How many shares did IWT repurchase? How many shares remained outstanding after the repurchase? What is its intrinsic stock price per share after the repurchase?