Evenflow Corp has 9 million shares of common stock outstanding, 250,000 shares outstanding of preferred stocks, and 8,000 semiannual bonds outstanding. 4. There are 8,000 semiannual bonds paying a 6.5% coupon with 20 years to maturity and currently selling for $920 per $1000 face value. b. The preferred stocks are selling for $93 paying $5constant dividends. The current market price of the stock is $57 and the beta is 1.05. The market risk premium is 8% а. с. and 4.5% risk-free rate. What is the weighted average cost of capital (WACC) if the marginal tax rate is 35%? If the cash flow from assets are -$135,000 in year 0, $46,000 in ycar 1, $57,000 in ycar 2, and $62,000 in year 3, should the firm accept or reject the project? The floatation costs for issuing debt, preferred stock and common stock are 5%, 3% and 7%, respectively. The firm plans to maintain the same capital structure. Considering floatation costs, should the project still be accepted? Why or why not? The firm is embarking on a project that is riskier than their current operations. They account for this by adding 2% to the current WACC. Should they accept or reject the project now? Why? How does the higher WACC affect the decision? Ignore flotation costs. Explain to Grandma how WACC is used in capital budgeting analysis. а. b. с. d. е.
Evenflow Corp has 9 million shares of common stock outstanding, 250,000 shares outstanding of preferred stocks, and 8,000 semiannual bonds outstanding. 4. There are 8,000 semiannual bonds paying a 6.5% coupon with 20 years to maturity and currently selling for $920 per $1000 face value. b. The preferred stocks are selling for $93 paying $5constant dividends. The current market price of the stock is $57 and the beta is 1.05. The market risk premium is 8% а. с. and 4.5% risk-free rate. What is the weighted average cost of capital (WACC) if the marginal tax rate is 35%? If the cash flow from assets are -$135,000 in year 0, $46,000 in ycar 1, $57,000 in ycar 2, and $62,000 in year 3, should the firm accept or reject the project? The floatation costs for issuing debt, preferred stock and common stock are 5%, 3% and 7%, respectively. The firm plans to maintain the same capital structure. Considering floatation costs, should the project still be accepted? Why or why not? The firm is embarking on a project that is riskier than their current operations. They account for this by adding 2% to the current WACC. Should they accept or reject the project now? Why? How does the higher WACC affect the decision? Ignore flotation costs. Explain to Grandma how WACC is used in capital budgeting analysis. а. b. с. d. е.
Chapter6: Fixed-income Securities: Characteristics And Valuation
Section: Chapter Questions
Problem 15P
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Transcribed Image Text:Evenflow Corp has 9 million shares of common stock outstanding, 250,000 shares outstanding of preferred
stocks, and 8,000 semiannual bonds outstanding.
4.
There are 8,000 semiannual bonds paying a 6.5% coupon with 20 years to maturity and currently
selling for $920 per $1000 face value.
b. The preferred stocks are selling for $93 paying $5constant dividends.
The current market price of the stock is $57 and the beta is 1.05. The market risk premium is 8%
and 4.5% risk-free rate.
а.
с.
What is the weighted average cost of capital (WACC) if the marginal tax rate is 35%?
If the cash flow from assets are -$135,000 in year 0, $46,000 in year 1, $57,000 in year 2, and $62,000
in year 3, should the firm accept or reject the project?
The floatation costs for issuing debt, preferred stock and common stock are 5%, 3% and 7%,
respectively. The firm plans to maintain the same capital structure. Considering floatation costs, should
the project still be accepted? Why or why not?
The firm is embarking on a project that is riskier than their current operations. They account for this by
adding 2% to the current WACC. Should they accept or reject the project now? Why? How does the
higher WACC affect the decision? Ignore flotation costs.
Explain to Grandma how WACC is used in capital budgeting analysis.
а.
b.
с.
d.
е.
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