A certain company must raise SR 220 million to fund its next project. 25% of the funds will come froma bank loan, which is charging 6.5%. 45% of the funds will come from issuing corporate bonds, at arate of 4.5%. The remaining funds will be raised by selling preferred stock, with a promise of dividendpayments of 7.8%.WACC:

WACC is the weighted average cost of capital considering the weight of each component debt, loan and…

Answered: pany oan, which is charging 6.5%. 45%…

pany oan, which is charging 6.5%. 45% of the funds will come from issuing .5%. The remaining funds will be raised by selling preferred stock, wit 6780

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Mary, Inc. is considering a project for next year, which will cost $5 million. Mary plans to use the following combination of debt and equity to finance the investment. Issue $1.5 million of 10-year bonds at a price of 101, with a coupon/contract rate of 4%, and flotation costs of 2% of par. Use $3.5 million of funds generated from retained earnings. The equity market is expected to earn 8%. U.S. Treasury bonds are currently yielding 3%. The beta coefficient for Mary, Inc. is estimated to be .70. Mary is subject to an effective corporate income tax rate of 30 percent. Compute Mary's expected rate of return using the Capital Asset Pricing Model (CAPM). Please show calculations.
Mary, Inc. is considering a project for next year, which will cost $5 million. Mary plans to use the following combination of debt and equity to finance the investment. Issue $1.5 million of 10-year bonds at a price of 101, with a coupon/contract rate of 4%, and flotation costs of 2% of par. Use $3.5 million of funds generated from retained earnings. The equity market is expected to earn 8%. U.S. Treasury bonds are currently yielding 3%. The beta coefficient for Mary, Inc. is estimated to be .70. Mary is subject to an effective corporate income tax rate of 30 percent. Compute Mary's expected rate of return using the Capital Asset Pricing Model (CAPM). Please show calculations.
Slobe Telecom is considering a project for the coming year that will cost P50 million. Slobe plans to use the following combination of debt and equity to finance the the investment: a. Issue P15 million of 20-year bond at a price of 101, with a coupon rate of 8%, and floatation costs of 2% of par. b. Use P35 million of funds generated from earnings. The equity market is expected to earn 12%. US treasury bonds are currently yielding 5%. The beta coefficient of Slobe is estimated to be .60. Slobe is subject to to an effective tax rate of 40%. The before-tax cost of Slobe's planned debt financing , net of flotation costs, in the first year is ________. Assume the after-tax costs of debt is 7% and the cost of equity is 12%. The WACC must be _______. The company's expected rate of return under the CAPM must be ________.
igital Organics (DO) has the opportunity to invest $1.03 million now (t = 0) and expects after 2. The project will last for two years = - tax returns of $630,000 in t = 1 and $730,000 in t only. The appropriate cost of capital is 11% with all - equity financing, the borrowing rate is 7%, and DO will borrow $330,000 against the project. This debt must be repaid in two equal installments of $165,000 each. Assume debt tax shields have a net value of $0.20 per dollar of interest paid. Calculate the project's APV.
Sunshine Corporation is reviewing an investment proposal. The initial cost of the investment is R52 500. The estimated cash flows and net profit for each year are presented in the schedule below. All cash flows are assumed to take place at the end of the year. year Net cash flows Net profit 1 20000 2500 2 17500 3500 3 15000 4500 4 12500 5500 5 10000 6500 The cost of capital is 12%. Required:Calculate the following:1. Payback Period 2. Net Present value 3. Accounting rate of return
Ship Shape Marine (SSM) needs $92 million to support future growth. If SSM issues bonds to raise funds, flotation (issuance) costs will be 8 percent. Each bond will be sold for $1,000; fractions of bonds cannot be issued. How many bonds must be issued so that SSM has $92 million after flotation costs to use for its planned growth?108,00092,00084,64099,360100,000
Krishna Enterprises Ltd is considering different methods to finance its expansion proposal. Estimated funds required are ₹ 60,00,000. Two alternative methods are available for raising the funds:I To raise ₹ 60,00,000 by issuing Equity Shares of ₹100 each ,II To raise ₹ 25,00,000 by issuing Equity Shares of ₹ 100 each and ₹ 35,00,000 through Term Loan @ 10% interest per annum.The existing capital structure of the company consists of 20,000 equity shares of ₹ 100 each and the expected EBIT (Earnings before interest and tax) is ₹ 11,40,000. Corporate tax rate is 25%, Advise the company on the basis of EPS in each alternative.
To assist with evaluating potential capital projects, Insignia Corporation Limited is seeking to determine its Weighted Average Cost of Capital. Utilising information from the financial statements, the company has the following capital structure: Debt: Bonds outstanding has a face value of $835,000,000, currently selling at 105% of par. The coupon rate on these bonds is 9% and there is 10 years left to maturity. (Hint: you can use the lowest multiple of $1,000 for the YTM calculation only) Common stock: 13,000,000 shares of common stock outstanding with a market price of $60.00. The company has no preference shares outstanding. Additional Information: The Company’s tax rate is 30%. The current risk free rate is 3.50%; market return is 8%. The Company’s beta is 2.50. Required: Calculate the Weighted Average Cost of Capital for Insignia Corporation Limited.
Neverlever, Inc. Is trying to decide how best to finance a proposed P10 million capital investment. Under Plan A, the project will be financed entirely with long term 9% bonds. The firm currently has no debt or preferred stock. Under Plan B, common stock will be sold to net the firm P20.00 per share; presently one (1) million shares are outstanding. The corporate tax rate is 25%. The company is expected to have an EBIT amounting to P3.0M. Required: 1. What will be the firm’s ROE next year if the firm issues new common stock? 2. What will be the firm’s ROE next year if the firm issues 9% bonded indebtedness?
Eagle Sports Products (ESP) is considering issuing debt to raise funds to financeits growth during the next few years. The amount of the issue will be between$35 million and $40 million. ESP has already arranged for a local investmentbanker to handle the debt issue. The arrangement calls for ESP to pay flotationcosts equal to 4 percent of the total market value of the issue.a. Compute the flotation costs that ESP will have to pay if the market valueof the debt issue is $39 million.b. If the debt issue has a market value of $39 million, how much will ESP beable to use for its financing needs? That is, what will be the net proceedsfrom the issue for ESP? Assume that the only costs associated with the issueare those paid to the investment banker.c. If the company needs $39 million to finance its future growth, how muchdebt must ESP issue?
Neverlever, Inc. Is trying to decide how best to finance a proposed P10 million capital investment. Under Plan A, the project will be financed entirely with long term 9% bonds. The firm currently has no debt or preferred stock. Under Plan B, common stock will be sold to net the firm P20.00 per share; presently one (1) million shares are outstanding. The corporate tax rate is 25%. The company is expected to have an EBIT amounting to P3.0M. Required:1. What will be the projected EPS next year if new common shares will be issued?2. What will be the projected EPS next year if 9% bonds will be issued?
A new company plans to obtain P18 million financing. The company expects to obtain a yearly income of P2 million before interest and taxes. The firm is considering issuing bonds or an equal amount of bonds and preferred stock. The interest rate on bonds is 14 percent. The tax rate is 46 percent. What financing strategy would you recommend??

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