Concept explainers
a.
To determine: The after tax cost of debt, the cost of
Weighted Average Cost of Capital (WACC):
The Weighted Average Cost of Capital is the rate that a firm is expected to pay on average to all of its shareholders to finance its assets. WACC is the firm’s cost of capital and is dictated by the external market of the firm.
It represents the minimum return that a firm ought to earn on an existing asset base in order to satisfy its creditors, owners, and other providers of capital, or else they would invested somewhere else.
a.
Explanation of Solution
Calculate the cost of debt.
Therefore, the cost of debt is 6.5%.
Calculate the cost of preferred stock.
Therefore, the cost of preferred stock is 11%.
Calculate the cost of newly issued equity stock.
Therefore, the cost of newly issued equity stock is 13.62%.
Calculate the cost of equity from retained stock.
Therefore, the cost of equity from retained stock is 13.16%.
Hence, the after tax cost of debt, the cost of preferred stock, the cost of equity from retained earnings, and the cost of newly issued common stock are calculated as above.
b.
To determine: The cost of retained earnings using the
b.
Explanation of Solution
Calculate the cost of retained earnings.
Hence, the cost of retained earnings is 13.53%.
c.
To determine: The cost of newly issued stock using CAPM method.
c.
Explanation of Solution
Calculate the cost of newly issued stock.
Hence, the cost of newly issued stock is 13.99%.
d.
To determine: The weightage average cost of capital (WACC) from retained earnings and from newly issued stocks.
d.
Explanation of Solution
Calculate the WACC if retained earnings are used.
Therefore, the WACC with retained earnings is 11.08%.
Calculate the WACC if newly issued stocks are used.
Therefore, the WACC with newly issued stocks is 11.23%.
Hence, the weightage average cost of capital (WACC) from retained earnings and from newly issued stocks are calculated as above.
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Chapter 10 Solutions
Fundamentals of Financial Management, Concise Edition (Looseleaf) - With Access
- Income Statement Ratio The income statement of Holly Enterprises shows operating revenues of $134,800, selling expenses of $38,310, general and administrative expenses of $36,990, interest expense of $580, and income tax expense of $13,920. Hollys stockholders equity was $280,000 at the beginning of the year and $320,000 at the end of the year. The company has 20,000 shares of stock outstanding at the end of the year. Required Compute Hollys profit margin. What other information would you need in order to comment on whether this ratio is favorable?arrow_forwardErnst Companys balance sheet shows total liabilities of 32,500,000, total stockholders equity of 8,125,000, and total assets of 40,625,000. Required: Note: Round answers to two decimal places. 1. Calculate the debt ratio. 2. Calculate the debt-to-equity ratio.arrow_forwardRebert Inc. showed the following balances for last year: Reberts net income for last year was 3,182,000. Refer to the information for Rebert Inc. above. Also, assume that the dividends paid to common stockholders for last year were 2,600,000 and that the market price per share of common stock is 51.50. Required: 1. Compute the dividends per share. 2. Compute the dividend yield. (Note: Round to two decimal places.) 3. Compute the dividend payout ratio. (Note: Round to two decimal places.)arrow_forward
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