Solo Inc. has 70,000 bonds that are currently priced at face ralue, ($1,000). The bonds have a coupon rate of 7.0%. Solo also has 550,000 shares of 7% preferred stock (face value $100 per share), along with 2.0 million shares of common stock outstanding. The equity has a beta of 1.25 and is selling for $40 per share. The preferred stock is selling for $60 per shares. The U.S. Treasury bill is yielding 3.0% and the market return is 11.0%. If the tax rate is 35%, what is the firm's applicable discount rate? (Show your work)

Solo Inc. has 70,000 bonds that are currently priced at face ralue, ($1,000). The bonds have a coupon rate of 7.0%. Solo also has 550,000 shares of 7% preferred stock (face value $100 per share), along with 2.0 million shares of common stock outstanding. The equity has a beta of 1.25 and is selling for $40 per share. The preferred stock is selling for $60 per shares. The U.S. Treasury bill is yielding 3.0% and the market return is 11.0%. If the tax rate is 35%, what is the firm's applicable discount rate? (Show your work)

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter6: Fixed-income Securities: Characteristics And Valuation

Section: Chapter Questions

Problem 17P

See similar textbooks

Similar questions

Masterson, Inc., has 7 million shares of common stock outstanding. The current share price is $73, and the book value per share is $8. The company also has two bond issues outstanding. The first bond issue has a face value of $90 million, has a coupon rate of 6 percent, and sells for 98 percent of par. The second issue has a face value of $75 million, has a coupon rate of 5 percent, and sells for 110 percent of par. The first issue matures in 22 years, the second in 7 years. Both bonds make semiannual coupon payments. a. What are the company's capital structure weights on a book value basis? (Do not round intermediate calculations and round your answers to 4 decimal places, e.g., .1616.) b. What are the company’s capital structure weights on a market value basis? (Do not round intermediate calculations and round your answers to 4 decimal places, e.g., .1616.) c. Which are more relevant, the book or market value weights?
Masterson, Inc., has 8 million shares of common stock outstanding. The current share price is $82, and the book value per share is $6. The company also has two bond issues outstanding. The first bond issue has a face value of $135 million, has a coupon rate of 7 percent, and sells for 93 percent of par. The second issue has a face value of $120 million, has a coupon rate of 6 percent, and sells for 102 percent of par. The first issue matures in 25 years, the second in 9 years. Both bonds make semiannual coupon payments. What are the company's capital structure weights on a book value basis? Equity/Value ___________ Debt/Value ____________ What are the company's capital structure weights on a market value basis? Equity/Value __________ Debt/Value ___________
Lingenburger Cheese Corporation has 8.3 million shares of common stock outstanding, 305,000 shares of 3.9 percent preferred stock outstanding, and 190,000 bonds with a semiannual coupon rate of 5.2 percent outstanding, par value $2,000 each. The common stock currently sells for $56 per share and has a beta of 1.20, the preferred stock has a par value of $100 and currently sells for $100 per share, and the bonds have 19 years to maturity and sell for 108 percent of par. The market risk premium is 6.8 percent, T-bills are yielding 3.2 percent, and the company’s tax rate is 25 percent. a. What is the firm’s market value capital structure? (Do not round intermediate calculations and
You are given the following information for the Buster Bronco company. There are 9700 bonds outstanding with a 7 percent coupon, $1,000 par value, 21 years to maturity, semiannual payments, and are selling for 105 percent of par. There are 2300 shares of 4.5 percent preferred stock outstanding with a $100 par value and a current price of $97 per share. There are 57,000 shares of common stock outstanding, trading at $73 per share, with a 1.46 beta. The United States has a 21% corporate tax rate, a T-bill return of 4.78 percent, and a 14.5% expected equity market return What is the cost of preferred equity? (percentage)
ABC Corp has 20,000 shares of bonds outstanding with a coupon rate of 6%, face value of $1,000, and 30 years to maturity. The bonds are selling for 110 percent of par and make semiannual payments. The company also has 600,000 shares outstanding of common stock selling for $67 per share. The beta of the stock is 1.29 and the tax rate is 21%. a. If the Treasury bill rate is 3% and the market risk premium is estimated at 7%., what is ABC’s cost of equity capital? b. What is the WACC? c. ABC Corp plans to expand the current operations. If the project will pay a cash flow of 10,000 next year and then cash flows growing at a rate of 4% over the next 3 years (for a total of 4 of cash flows), what is the most ABC is willing to spend on the initial investment for this project? Please show exceln formulas
The Smith Company has 10,000 bonds outstanding. The bonds are selling at 102% of face value, have a 8% coupon rate, pay interest annually, mature in 10 years, and have a face value of $1,000. There are 500,000 shares of 9% preferred stock outstanding with a current market price of $91 a share and a par value of $100. In addition, there are 1.25 million shares of common stock outstanding with a market price of $64 a share and a beta of .95. The most recent dividend paid by the company on the common stock was of $1.10 and it expects to increase those dividends by 3% annually forever. The firm's marginal tax rate is 35%. The overall stock market is yielding 12% and the Treasury bill rate is 3.5%. What is the cost of equity based on the dividend growth model?
The Smith Company has 10,000 bonds outstanding. The bonds are selling at 102% of face value, have a 8% coupon rate, pay interest annually, mature in 10 years, and have a face value of $1,000. There are 500,000 shares of 9% preferred stock outstanding with a current market price of $91 a share and a par value of $100. In addition, there are 1.25 million shares of common stock outstanding with a market price of $64 a share and a beta of .95. The most recent dividend paid by the company on the common stock was of $1.10 and it expects to increase those dividends by 3% annually forever. The firm's marginal tax rate is 35%. The overall stock market is yielding 12% and the Treasury bill rate is 3.5%. What market weights should be given to the various capital components in the weighted average cost of capital computation?
The Smith Company has 10,000 bonds outstanding. The bonds are selling at 102% of face value, have a 8% coupon rate, pay interest annually, mature in 10 years, and have a face value of $1,000. There are 500,000 shares of 9% preferred stock outstanding with a current market price of $91 a share and a par value of $100. In addition, there are 1.25 million shares of common stock outstanding with a market price of $64 a share and a beta of .95. The most recent dividend paid by the company on the common stock was of $1.10 and it expects to increase those dividends by 3% annually forever. The firm's marginal tax rate is 35%. The overall stock market is yielding 12% and the Treasury bill rate is 3.5%.What is the weighted average cost of capital using the cost equity calculated based on CAPM?
The Smith Company has 10,000 bonds outstanding. The bonds are selling at 102% of face value, have a 8% coupon rate, pay interest annually, mature in 10 years, and have a face value of $1,000. There are 500,000 shares of 9% preferred stock outstanding with a current market price of $91 a share and a par value of $100. In addition, there are 1.25 million shares of common stock outstanding with a market price of $64 a share and a beta of .95. The most recent dividend paid by the company on the common stock was of $1.10 and it expects to increase those dividends by 3% annually forever. The firm's marginal tax rate is 35%. The overall stock market is yielding 12% and the Treasury bill rate is 3.5%. a) What is the cost of equity based on the dividend growth model? b) What is the cost of equity based on the security market line? c) What market weights should be given to the various capital components in the weighted average cost of capital computation? d) What is the weighted average cost…
The Smith Company has 10,000 bonds outstanding. The bonds are selling at 102% of face value, have a 8% coupon rate, pay interest annually, mature in 10 years, and have a face value of $1,000. There are 500,000 shares of 9% preferred stock outstanding with a current market price of $91 a share and a par value of $100. In addition, there are 1.25 million shares of common stock outstanding with a market price of $64 a share and a beta of .95. The most recent dividend paid by the company on the common stock was of $1.10 and it expects to increase those dividends by 3% annually forever. The firm's marginal tax rate is 35%. The overall stock market is yielding 12% and the Treasury bill rate is 3.5%. a) What market weights should be given to the various capital components in the weighted average cost of capital computation? b) What is the weighted average cost of capital using the cost equity calculated based on CAPM?
The Smith Company has 10,000 bonds outstanding. The bonds are selling at 102% of face value, have a 8% coupon rate, pay interest annually, mature in 10 years, and have a face value of $1,000. There are 500,000 shares of 9% preferred stock outstanding with a current market price of $91 a share and a par value of $100. In addition, there are 1.25 million shares of common stock outstanding with a market price of $64 a share and a beta of .95. The most recent dividend paid by the company on the common stock was of $1.10 and it expects to increase those dividends by 3% annually forever. The firm's marginal tax rate is 35%. The overall stock market is yielding 12% and the Treasury bill rate is 3.5%. 1. What is the cost of equity based on the dividend growth model? 2. What is the cost of equity based on the security market line? 3. What market weights should be given to the various capital components in the weighted average cost of capital computation? 4. What is the weighted average…
The Smith Company has 10,000 bonds outstanding. The bonds are selling at 102% of face value, have a 8% coupon rate, pay interest annually, mature in 10 years, and have a face value of $1,000. There are 500,000 shares of 9% preferred stock outstanding with a current market price of $91 a share and a par value of $100. In addition, there are 1.25 million shares of common stock outstanding with a market price of $64 a share and a beta of .95. The most recent dividend paid by the company on the common stock was of $1.10 and it expects to increase those dividends by 3% annually forever. The firm's marginal tax rate is 35%. The overall stock market is yielding 12% and the Treasury bill rate is 3.5%. What is the cost of equity based on the security market line?