Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)
8th Edition
ISBN: 9781285065137
Author: Eugene F. Brigham, Joel F. Houston
Publisher: Cengage Learning
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Chapter 10, Problem 1DQ
As a first step, we need to estimate what percentage of MMM’s capital comes from debt,
- a. Recall that the weights used in the WACC are based on the company’s target capital structure. If we assume that the company wants to maintain the same mix of capital that it currently has on its balance sheet, what weights should you use to estimate the WACC for MMM?
- b. Find MMM’s market capitalization, which is the market value of its common equity. Using the sum of its short-term debt and long-term debt from the balance sheet (we assume that the market value of its debt equals its book value) and its market capitalization, recalculate the firm’s debt and common equity weights to be used in the WACC equation. These weights are approximations of market-value weights. Be sure not to include accruals in the debt calculation.
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Terrell Trucking Company is in the process of setting its target capital structure. The CFO believes that the optimal debt-to-capital ratio is somewhere between 20% and 50%, and her staff has compiled the following projections for EPS and the stock price at various debt levels:
Debt/Capital Ratio
Projected EPS
Projected Stock Price
20%
$3.15
$32.50
30
3.50
36.00
40
3.75
38.00
50
3.55
32.00
Assuming that the firm uses only debt and common equity, what is Terrell's optimal capital structure? Choose from the options provided above. Round your answers to two decimal places.
% debt % equity
At what debt-to-capital ratio is the company's WACC minimized? Choose from the options provided above. Round your answer to two decimal places.
%
The calculation of WACC involves calculating the weighted average of the required rates of return on debt, preferred stock, and common equity, where the weights equal the percentage of each type of financing in the firm’s overall capital structure.
is the symbol that represents the before-tax cost of debt in the weighted average cost of capital (WACC) equation.
Wyle Co. has $1.4 million of debt, $2.5 million of preferred stock, and $3.3 million of common equity. What would be its weight on debt?
0.28
0.32
0.19
0.46
Dillon Labs has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The weighted average cost is to be measured by using the following weights:
40% long-term debt, 15% preferred stock, and 45%
common stock equity (retained earnings, new common stock, or both). The firm's tax rate is 26%.
Debt The firm can sell for $1005 a 13-year, $1,000-par-value bond paying annual interest at a 6.00% coupon rate. A flotation cost of 2.5% of the par value is required.
Preferred stock 7.00% (annual dividend) preferred stock having a par value of $100 can be sold for $98. An additional fee of $5 per share must be paid to the underwriters.
Common stock The firm's common stock is currently selling for
$80 per share. The stock has paid a dividend that has gradually increased for many years, rising from $2.50 ten years ago to the $4.92 dividend payment, D0, that the company just recently made. If…
Chapter 10 Solutions
Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)
Ch. 10 - How would each of the following scenarios affect a...Ch. 10 - Assume that the risk-free rate increases, but the...Ch. 10 - How should the capital structure weights used to...Ch. 10 - Suppose a firm estimates its WACC to be 10%....Ch. 10 - The WACC is a weighted average of the costs of...Ch. 10 - AFTER-TAX COST OF DEBT The Heuser Companys...Ch. 10 - COST OF PREFERRED STOCK Tunney Industries can...Ch. 10 - COST OF COMMON EQUITY Percy Motors has a target...Ch. 10 - COST OF EQUITY WITH AND WITHOUT FLOTATION Javits ...Ch. 10 - PROJECT SELECTION Midwest Water Works estimates...
Ch. 10 - COST OF COMMON EQUITY The future- earnings,...Ch. 10 - COST OF COMMON EQUITY WITH AND WITHOUT FLOTATION...Ch. 10 - Prob. 8PCh. 10 - WACC The Patrick Companys year-end balance sheet...Ch. 10 - WACC Klose Outfitters Inc. believes that its...Ch. 10 - WACC AND PERCENTAGE OF DEBT FINANCING Hook...Ch. 10 - WACC Midwest Electric Company (MKC) uses only debt...Ch. 10 - COST OF COMMON EQUITY WITH FLOTATION Ballack Co.s...Ch. 10 - COST OF PREFERRED STOCK INCLUDING FLOTATION...Ch. 10 - WACC AND COST OF COMMON EQUITY Kahn Inc. has a...Ch. 10 - Prob. 16PCh. 10 - CALCULATION OF g AND EPS Sidman Productss common...Ch. 10 - WACC AND OPTIMAL CAPITAL BUDGET Adams Corporation...Ch. 10 - ADJUSTING COST OF CAPITAL FOR RISK Ziege Systems...Ch. 10 - WACC The following table gives Foust Company's...Ch. 10 - Prob. 21SPCh. 10 - COLEMAN TECHNOLOGIES INC. COST OF CAPITAL Coleman...Ch. 10 - As a first step, we need to estimate what...Ch. 10 - Prob. 2DQCh. 10 - Next, we need to calculate MMMs cost of debt. We...
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