The table below shows a book balance sheet for the Wishing Well Motel chain. The company's long-term debt is secured by its realestate assets, but it also uses short-term bank loans as a permanent source of financing. It pays 13% interest on the bank debt and 11%interest on the secured debt. Wishing Well has 10 million shares of stock outstanding, trading at $85 per share. The expected return onWishing Well's common stock is 18%. (Table figures in $ millions.)$ 130$270Bank loanCash and marketable securities170Accounts payableAccounts receivable290$440InventoryCurrent liabilities50$2,400470Current assetsLong-term debtEquity2,150Real estate400120Other assets$ 2,990$ 2,990TotalTotalCalculate Wishing Well's WACC. Assume that the book and market values of Wishing Well's debt are the same. The marginal tax rate is21%. (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.)Weighted-average cost of capital

Calculation of Total Market Value:

Answered: The table below shows a book balance…

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter9: The Cost Of Capital

Section: Chapter Questions

Problem 17P

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The following table gives the current balance sheet for Travellers Inn Inc. (TII), a company that was formed by merging a number of regional motel chains. Travellers Inn (Millions of Dollars) The following facts also apply to TII. (1) The long-term debt consists of 29,412 bonds, each having a 20-year maturity, semiannual payments, a coupon rate of 7.6%, and a face value of 1,000. Currently, these bonds provide investors with a yield to maturity of 11.8%. If new bonds were sold, they would have an 11.8% yield to maturity. (2) TIIs perpetual preferred stock has a 100 par value, pays a quarterly dividend per share of 2, and has a yield to investors of 10%. New perpetual preferred stock would have to provide the same yield to investors, and the company would incur a 3.85% flotation cost to sell it. (3) The company has 3.8 million shares of common stock outstanding, a price per share = P0 = 20, dividend per share = D0 = 1, and earnings per share = EPS0 = 5. The return on equity (ROE) is expected to be 10%. (4) The stock has a beta of 1.6%. The T-bond rate is 6%, and RPM is estimated to be 5%. (5) TIIs financial vice president recently polled some pension fund investment managers who hold TIIs securities regarding what minimum rate of return on TIIs common would make them willing to buy the common rather than TII bonds, given that the bonds yielded 11.8%. The responses suggested a risk premium over TII bonds of 3 percentage points. (6) TII is in the 25% federal-plus-state tax bracket. Assume that you were recently hired by TII as a financial analyst and that your boss, the treasurer, has asked you to estimate the companys WACC under the assumption that no new equity will be issued. Your cost of capital should be appropriate for use in evaluating projects that are in the same risk class as the assets TII now operates. Based on your analysis, answer the following questions. a. What are the current market value weights for debt, preferred stock, and common stock? (Hint: Do your work in dollars, not millions of dollars. When you calculate the market values of debt and preferred stock, be sure to round the market price per bond and the market price per share of preferred to the nearest penny.) b. What is the after-tax cost of debt? c. What is the cost of preferred stock? d. What is the required return on common stock using CAPM? e. Use the retention growth equation to estimate the expected growth rate. Then use the expected growth rate and the dividend growth model to estimate the required return on common stock. f. What is the required return on common stock using the own-bond-yield-plus-judgmental-risk-premium approach? g. Use the required return on stock from the CAPM model, and calculate the WACC.
Vigo Vacations has $200 million in total assets, $5 million in notes payable, and $25 million in long-term debt. What is the debt ratio?
The table below shows a book balance sheet for the Wishing Well Motel chain. The company’s long-term debt is secured by its real estate assets, but it also uses short-term bank loans as a permanent source of financing. It pays 11% interest on the bank debt and 9% interest on the secured debt. Wishing Well has 10 million shares of stock outstanding, trading at $89 per share. The expected return on Wishing Well’s common stock is 22%. (Table figures in $ millions.) Cash and marketable securities $ 170 Bank loan $ 310 Accounts receivable 330 Accounts payable 180 Inventory 50 Current liabilities $ 490 Current assets $ 550 Real estate 2,600 Long-term debt 2,400 Other assets 140 Equity 400 Total $ 3,290 Total $ 3,290 Calculate Wishing Well’s WACC. Assume that the book and market values of Wishing Well’s debt are the same. The marginal tax rate is 21%. (Do not round intermediate calculations. Enter your answer as a…
A bank reports that the total amount of its net loans and leases outstanding is $936 million, its assets total $1,324 million, its equity capital amounts to $110 million, and it holds $1,150 million in deposits, all expressed in book value. The estimated market values of the bank's total assets and equity capital are $1,443 million and $130 million, respectively. The bank's stock is currently valued at $60 per share with annual per-share earnings of $2.50. Uninsured deposits amount to $243 million and money-market borrowings total $132 million, while nonperforming loans currently amount to $43 million and the bank just charged off $21 million in loans. Calculate risk measures as you can from the foregoing data.
A bank reports that the total amount of its net loans and leases outstanding is $936 million, its assets total $1,324 million, its equity capital amounts to $110 million, and it holds $1,150 million in deposits, all expressed in book value. The estimated market values of the bank's total assets and equity capital are $1,443 million and $130 million, respectively. The bank's stock is currently valued at $60 per share with annual per-share earnings of $2.50. Uninsured deposits amount to $243 million and money-market borrowings total $132 million, while nonperforming loans currently amount to $43 million and the bank just charged off $21 million in loans. Calculate risk measures as you can from the foregoing data. If I see 100% similarity answers from the same question I posted before, I will thumbs down.
A bank reports that the total amount of its net loans and leases outstanding is $936 million, its assets total $1,324 million, its equity capital amounts to $110 million, and it holds $1,150 million in deposits, all expressed in book value. The estimated market values of the bank's total assets and equity capital are $1,443 million and $130 million, respectively. The bank's stock is currently valued at $60 per share with annual per-share earnings of $2.50. Uninsured deposits amount to $243 million and money-market borrowings total $132 million, while nonperforming loans currently amount to $43 million and the bank just charged off $21 million in loans. Calculate risk measures as you can from the foregoing data. If I see 100% similarity answers from the same question I posted before, I will thumbs down. If you answered the first question I posted, dont take this!!!!
Clayton Industries has the following account balances: Current assets $ 24,000 Current liabilities $ 8,000 Noncurrent assets 89,000 Noncurrent liabilities 54,000 Stockholders’ equity 51,000 The company wishes to raise $34,000 in cash and is considering two financing options: Clayton can sell $34,000 of bonds payable, or it can issue additional common stock for $34,000. To help in the decision process, Clayton’s management wants to determine the effects of each alternative on its current ratio and debt-to-assets ratio. Required a-1. Compute the current ratio for Clayton’s management. (Note: Round your answers to 2 decimal places.)
Lilly Inc has a DSO of 20 days, and its annual sales are $3,550,000. What is its accounts receivable balance? Assume that it uses a 365-day year. Lilly's Tax has a market/book ratio equal to 1. its stock price is $13 per share and it has 4.6 million shares outstanding. The firm's total capital is $115 million and its finances with only debt and common equity. what is its debt-to-capital ratio? Lilly's Tax has an ROA of 11%, a 5% profit margin, and an ROE of 23%. What is its total assets turnover? What is its equity multiplier? Lilly's Tax has an EPS of $2.40, a book value per share of $22.84, and a market/book ratio of 27X. What is its P/E ratio?
Conrad Corporation plans to raise $8 million to pay off its existing short-term bank loan of $2.4 million and to increase total assets by $5,600,000. The bank loan bears an interest rate of 12 percent. The company's president owns 55% of the 4,000,000 shares of common stock and wishes to maintain control of the company. The company's tax rate is 21%. Balance sheet information is shown below. The company is considering two alternatives to raise the $8 million: (1) sell common stock at $20 per share, or (2) Sell bonds at a 12% coupon, each $1,000 bond carrying 25 warrants to buy common stock at $30 per share. Calculate the debt ratio under both alternatives Which alternative do you recommend and why? Current Liabilities $3,000,000 Common Stock, Par $0.50 2,000,000 Retained earnings 1,400,000 Total Assets $6,400,000 Total claims $6,400,000 Alternative 1: Common stock $20 Tax rate 35% # new shares 400,000 New financing…
Conrad Corporation plans to raise $8 million to pay off its existing short-term bank loan of $2.4 million and to increase total assets by $5,600,000. The bank loan bears an interest rate of 12 percent. The company's president owns 55% of the 4,000,000 shares of common stock and wishes to maintain control of the company. The company's tax rate is 21%. Balance sheet information is shown below. The company is considering two alternatives to raise the $8 million: (1) sell common stock at $20 per share, or (2) Sell bonds at a 12% coupon, each $1,000 bond carrying 25 warrants to buy common stock at $30 per share. Current Liabilities $3,000,000 Common Stock, Par $0.50 2,000,000 Retained earnings 1,400,000 Total Assets $6,400,000 Total claims $6,400,000 Alternative 1: Common stock $20 Tax rate 35% # new shares 400,000 New financing $8,000,000 Par value per share $0.50 Existing Loan $2,400,000…
Please see attached image for the question also please show working. Data for Barry Computer Co. and its industry averages follow. The firm's debt is priced at par, so the market value of its debt equals its book value. Since dollars are in thousands, number of shares are shown in thousands too. Barry Computer Company: Balance Sheet as of December 31, 2018 (In Thousands) Cash $123,525 Accounts payable $219,600 Receivables 494,100 Other current liabilities 164,700 Inventories 329,400 Notes payable to bank 150,975 Total current assets $947,025 Total current liabilities $535,275 Long-term debt $384,300 Net fixed assets 425,475 Common equity (45,292.5 shares) 452,925 Total assets $1,372,500 Total liabilities and equity $1,372,500 Barry Computer Company:Income Statement for Year Ended December 31, 2018 (In Thousands) Sales $2,250,000 Cost of goods sold Materials $1,102,500 Labor 450,000 Heat,…
The UBSC ‘BirdsNest’ club has $500 worth of stock, $2,000 owed by debtors, $5,000 in cash, and it owes $3,500 to creditors payable within a year, what is its quick ratio?

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