Windsor, Inc. is considering these two alternatives to finance its construction of a new $1.76 million plant: Issuance of 176,000 shares of common stock at the market price of $10 per share. Issuance of $1.76 million, 7% bonds at face value. 1. 2. (a) Complete the table. (Round earnings per share to 2 decimal places, e.g. $2.66.) Issue Stock Issue Bonds Income before interest and taxes $1,584,000 $1,584,000 Interest expense from bonds Income before income taxes Income tax expense (40%) Net income

Windsor, Inc. is considering these two alternatives to finance its construction of a new $1.76 million plant: Issuance of 176,000 shares of common stock at the market price of $10 per share. Issuance of $1.76 million, 7% bonds at face value. 1. 2. (a) Complete the table. (Round earnings per share to 2 decimal places, e.g. $2.66.) Issue Stock Issue Bonds Income before interest and taxes $1,584,000 $1,584,000 Interest expense from bonds Income before income taxes Income tax expense (40%) Net income

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter20: Financing With Derivatives

Section: Chapter Questions

Problem 7P

See similar textbooks

Similar questions

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.
Cheyenne Corp. is considering two alternatives to finance its construction of a new $2 million plant. (a) Issuance of 200,000 shares of common stock at the market price of $10 per share. (b) Issuance of $2 million, 7% bonds at face value. Complete the following table. (Round earnings per share to 2 decimal places, e.g. 0.25.) Issue Stock Issue Bond Income before interest and taxes $735,000 $735,000 Interest expense from bonds Income before income taxes Income tax expense (25%) Net income $ $ Outstanding shares 535,000 Earnings per share $ $ Indicate which alternative is preferable.Net income is lowerhigher if stock is used. However, earnings per share is lowerhigher than earnings per share if bonds are used because of the additional shares…
Moby Inc. is considering two alternatives to finance its construction of a new $2 million plant. (a) Issuance of 200,000 shares of common stock at the market price of $10 per share. (b) Issuance of $2 million, 8% bonds at face value.
FarCry Industries, a maker of telecommunications equipment, has 3 million shares of common stock outstanding, 1 million shares of preferred stock outstanding, and 10,000 bonds. Suppose the common shares are selling for $28 per share, the preferred shares are selling for $15.00 per share, and the bonds are selling for 98 percent of par.What weight should you use for debt in the computation of FarCry’s WACC? (Round your answer to 2 decimal places.)
FarCry Industries, a maker of telecommunications equipment, has 5 million shares of common stock outstanding, 2 million shares of preferred stock outstanding, and 20,000 bonds. Suppose the common shares are selling for $27 per share, the preferred shares are selling for $14.50 per share, and the bonds are selling for 98 percent of par. What weight should you use for debt in the computation of FarCry’s WACC? (Round your answer to 2 decimal places.) Weight used %
The board of directors of Blossom Corporation is considering two plans for financing the purchase of new plant equipment. Plan #1 would require the issuance of $5,500,000, 8%, 20-year bonds at face value. Plan #2 would require the issuance of 200,000 shares of $5 par value common stock that is selling for $25 per share on the open market. Blossom Corporation currently has 120,000 shares of common stock outstanding and the income tax rate is expected to be 30%. Assume that income before interest and income taxes is expected to be $800,000 if the new factory equipment is purchased.Prepare a schedule that shows the expected net income after taxes and the earnings per share on common stock under each of the plans that the board of directors is considering. (If answer is zero please enter 0, do not leave any fields blank. Round earnings per share to 2 decimal places, e.g. 5.25.) Plan #1Issue Bonds Plan #2Issue Stock select an option…
FarCry Industries, a maker of telecommunications equipment, has 3 million shares of common stock outstanding, 1 million shares of preferred stock outstanding, and 10,000 bonds. Suppose the common shares are selling for $28 per share, the preferred shares are selling for $15.00 per share, and the bonds are selling for 98 percent of par.What weight should you use for debt in the computation of FarCry’s WACC? (Round your answer to 2 decimal
FarCry Industries, a maker of telecommunications equipment, has 2 million shares of common stock outstanding, 1 million shares of preferred stock outstanding, and 10,000 bonds. Suppose the common shares are selling for $27 per share, the preferred shares are selling for $14.50 per share, and the bonds are selling for 98 percent of par.What would be the weight used for equity in the computation of FarCry’s WACC? (Round your answer to 2 decimal places.)
Consider the following facts to solve problems 1 through 5. A. The capital for investment of Executive Consultants, Inc. is as follows: Sources of capital Capital Debt (corporate bonds) $4,100,000 Prefferent shares $2,200,000 Common shares $2,800,000 B. To generate the $ 4.1 million of corporate bond capital, they issued bonds at $ 965 par value, with an annual coupon of $ 100 for the next 10 years, with a flotation cost of $ 10 per bond.C. The issue of preferred shares has a cost of $ 5 per share and will pay a dividend of 10% of its par value of $ 110 per preferred share.D. The risk-free rate is 3.45% and the market return is 11.25%. The company's beta coefficient is 1.23.E. Executive Consultants, Inc. has a tax liability of 35%.Problems:You must submit the procedure and all the calculations.1. Determine the capital structure of Executive Consultants, Inc.2. Calculate the cost of debt.3. Calculate the cost of preferred equity.4. Calculate the cost of…
Consider the following facts to solve problems 1 through 5. A. The capital for investment of Executive Consultants, Inc. is as follows: Sources of capital Capital Debt (corporate bonds) $4,100,000 Prefferent shares $2,200,000 Common shares $2,800,000 B. To generate the $ 4.1 million of corporate bond capital, they issued bonds at $ 965 par value, with an annual coupon of $ 100 for the next 10 years, with a flotation cost of $ 10 per bond.C. The issue of preferred shares has a cost of $ 5 per share and will pay a dividend of 10% of its par value of $ 110 per preferred share.D. The risk-free rate is 3.45% and the market return is 11.25%. The company's beta coefficient is 1.23.E. Executive Consultants, Inc. has a tax liability of 35%.Problems:You must submit the procedure and all the calculations.1. Determine the capital structure of Executive Consultants, Inc.2. Calculate the cost of debt.3. Calculate the cost of preferred equity.