The Nolan Corporation finds it is necessary to determine its marginal cost of capital. Nolan'scurrent capital structure calls for 35 percent debt, 25 percent preferred stock, and 40 percentcommon equity. Initially, common equity will be in the form of retained earnings (K) and thennew common stock (K). The costs of the various sources of financing are as follows: debt(after-tax), 6.2 percent; preferred stock, 8 percent; retained earnings, 11 percent; and newcommon stock, 12.2 percent.a. What is the initial weighted average cost of capital? (Include debt, preferred stock, andcommon equity in the form of retained earnings, Ke) (Do not round intermediate calculations.Input your answers as a percent rounded to 2 decimal places.)Weighted Cost%DebtPreferred stockCommon equityWeighted average cost of capital0.00 %b. If the firm has $28 million in retained earnings, at what size capital structure will the firm runout of retained earnings? (Enter your answer in millions of dollars (e.g., $10 million should beentered as "10").)Capital structure size (X)million

The individual weight of the various element of the capital structure(debt, preferred equity, and…

Answered: The Nolan Corporation finds it is…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter12: The Cost Of Capital

Section: Chapter Questions

Problem 14P

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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?
The Nolan Corporation finds it is necessary to determine its marginal cost of capital. Nolan’s current capital structure calls for 35 percent debt, 25 percent preferred stock, and 40 percent common equity. Initially, common equity will be in the form of retained earnings (Ke) and then new common stock (Kn). The costs of the various sources of financing are as follows: debt (after-tax), 8.6 percent; preferred stock, 8 percent; retained earnings, 14 percent; and new common stock, 15.2 percent. a. What is the initial weighted average cost of capital? (Include debt, preferred stock, and common equity in the form of retained earnings, Ke.) (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.) b. If the firm has $16 million in retained earnings, at what size capital structure will the firm run out of retained earnings? (Enter your answer in millions of dollars (e.g., $10 million should be entered as "10").) c. What will the marginal cost of…
The Nolan Corporation finds it is necessary to determine its marginal cost of capital. Nolan’s current capital structure calls for 40 percent debt, 10 percent preferred stock, and 50 percent common equity. Initially, common equity will be in the form of retained earnings (Ke) and then new common stock (Kn). The costs of the various sources of financing are as follows: debt (after-tax), 6.6 percent; preferred stock, 6 percent; retained earnings, 11 percent; and new common stock, 12.2 percent. a. What is the initial weighted average cost of capital? (Include debt, preferred stock, and common equity in the form of retained earnings, Ke.) (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.) Weighted Cost Debt % Preferred stock Common equity 5.50 Weighted average cost of capital % b. If the firm has $10 million in retained earnings, at what size capital structure will the firm run out of retained earnings? (Enter your answer in millions of…
The Nolan Corporation finds it is necessary to determine its marginal cost of capital. Nolan’s current capital structure calls for 40 percent debt, 10 percent preferred stock, and 50 percent common equity. Initially, common equity will be in the form of retained earnings (Ke) and then new common stock (Kn). The costs of the various sources of financing are as follows: debt (after-tax), 6.6 percent; preferred stock, 6 percent; retained earnings, 11 percent; and new common stock, 12.2 percent. a. What is the initial weighted average cost of capital? (Include debt, preferred stock, and common equity in the form of retained earnings, Ke.) (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal
The McGee Corporation finds it is necessary to determine its marginal cost of capital. McGee’s current capital structure calls for 50 percent debt, 20 percent preferred stock, and 30 percent common equity. Initially, common equity will be in the form of retained earnings (Ke) and then new common stock (Kn). The costs of the various sources of financing are as follows: debt (after-tax), 6.0 percent; preferred stock, 8.0 percent; retained earnings, 9.0 percent; and new common stock, 10.2 percent. a. What is the initial weighted average cost of capital? (Include debt, preferred stock, and common equity in the form of retained earnings, Ke.) (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.) Weighted Cost Debt % Preferred stock Common equity Weighted average cost of capital 0.00 %
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The Nunal Corporation finds that it is necessary to determine its marginal cost of capital. Nunal’s current capital structure calls for 45% debt, 15% preferred stock and 40% common equity. The costs of the various sources of financing are as follows: debt, after-tax 5.6%; preferred stock, 9%; retained earnings, 12%; and new common stock, 13.2%. If the firm has P12 million retained earnings, and Nunal has an opportunity to invest in an attractive project that costs P45 million, what is the marginal cost of capital of Nunal Corporation?
The beta corporation asks you to determine its marginal cost of capital. Beta’s current capital structure consists of 45% debt, 15% preferred stock and 40% common equity. The separate marginal costs of the various components of the capital structure are as follows: debt, after-tax 5.0 percent; preferred stock, 9 percent; retained earnings, 12 percent; and new common stock, 13.5 percent. If beta has 15 million investible retained earnings, and Beta has an opportunity to invest in an attractive project that costs 60million, what is the marginal cost of capital of Beta Corporation? 9.88% 8.63% 9.00% 8.40%
Baron Corporation has a target capital structure of 60 percent common stock, 5 percent preferred stock, and 35 percent debt. Its cost of equity is 11 percent, the cost of preferred stock is 5 percent, and the pretax cost of debt is 6 percent. The relevant tax rate is 23 percent. a. What is the company’s WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the aftertax cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Foundation, Inc., is comparing two different capital structures: an all- equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the company would have 145,000 shares of stock outstanding. Under Plan II, there would be 125, 000 shares of stock outstanding and $716, 000 in debt outstanding. The interest rate on the debt is 8 percent, and there are no taxes. a. If EBIT is $300, 000, which plan will result in the higher EPS? b . If EBIT is $600,000, which plan will result in the higher EPS? c. What is the break - even EBIT? d. use M&M Proposition I to find the price per share of equity under each of the two proposed plans. What is the value of the firm?
Cullumber Co. has a capital structure, based on current market values, that consists of 40 percent debt, 19 percent preferred stock, and 41 percent common stock. If the returns required by investors are 9 percent, 11 percent, and 15 percent for the debt, preferred stock, and common stock, respectively, what is Cullumber’s after-tax WACC? Assume that the firm’s marginal tax rate is 40 percent. - After tax WACC = ?%
Sandhill Co. has a capital structure, based on current market values, that consists of 35 percent debt, 19 percent preferred stock, and 46 percent common stock. If the returns required by investors are 12 percent, 13 percent, and 15 percent for the debt, preferred stock, and common stock, respectively, what is Sandhill’s after-tax WACC? Assume that the firm’s marginal tax rate is 40 percent.

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