CONTEMP. FINANCIAL MGT.-W/MINDTAP V3
14th Edition
ISBN: 9780357292839
Author: MOYER
Publisher: CENGAGE L
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Chapter 12, Problem 11P
Summary Introduction
To determine: The marginal cost of capital schedule.
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The Williams Company has a present capital structure (that it considers optimal) consisting of 30 percent long-term debt and 70 percent common equity. The company plans to finance next year’s capital budget with additional long-term debt and retained earnings. New debt can be issued at a coupon interest rate of 10 percent.The cost of retained earnings (internal equity) is estimated at 15 percent. The company’s marginal tax rate is 40 percent.Calculate the company’s weighted cost of capital for the coming year.
Quigley Inc. is considering two financial plans for the coming year. Management expects sales to be $300,000, operating costs to be $265,000, assets (which is equal to its total invested capital) to be $200,000, and its tax rate to be 35%. Under Plan A it would finance the firm using 25% debt and 75% common equity. The interest rate on the debt would be 8.8%, but under a contract with existing bondholders the TIE ratio would have to be maintained at or above 5.0. Under Plan B, the maximum debt that met the TIE constraint would be employed. Assuming that sales, operating costs, assets, total invested capital, the interest rate, and the tax rate would all remain constant, by how much would the ROE change in response to the change in the capital structure? Do not round your intermediate calculations
Olsen Outfitters Inc. believes that its optimal capital structure consists of 70% common equity and 30% debt, and its tax rate is 25 %. Olsen must raise additional capital to fund its upcoming
expansion. The firm will have $1 million of retained earnings with a cost of rs = 10%. New common stock in an amount up to $10 million would have a cost of re = 11.0%. Furthermore, Olsen
can raise up to $4 million of debt at an interest rate of rd = 11% and an additional $3 million of debt at rd = 14%. The CFO estimates that a proposed expansion would require an investment of
$8.8 million. What is the WACC for the last dollar raised to complete the expansion? Round your answer to two decimal places.
Chapter 12 Solutions
CONTEMP. FINANCIAL MGT.-W/MINDTAP V3
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- Humble Manufacturing is interested in measuring its overall cost of capital. The firm is inthe 40% tax bracket. Current investigation has gathered the following data:Debt The firm can raise debt by selling $1,000-par-value, 10% coupon interest rate, 10-year bonds on which annual interest payments will be made. To sell the issue, anaverage discount of $30 per bond must be given. The firm must also pay flotation costsof $20 per bond.Preferred stock The firm can sell 11% (annual dividend) preferred stock at its $100-per-share par value. The cost of issuing and selling the preferred stock is expected to be $4per share.Common stock The firm’s common stock is currently selling for $80 per share. The firmexpects to pay cash dividends of $6 per share next year. The firm’s dividends have beengrowing at an annual rate of 6%, and this rate is expected to continue in the future. Thestock will have to be underpriced by $4 per share, and flotation costs are expected toamount to $4 per share.Retained…arrow_forwardPoly is planning for P5 million in capital expenditures next year. Poly’s target capital structure consists of 60% debt and 40% equity. If net income next year is P3 million and Poly follows a residual distribution policy with all distributions as dividends, what will be its dividend payout ratio?arrow_forwardHumble Manufacturing is interested in measuring its overall cost of capital. The firm is inthe 40% tax bracket. Current investigation has gathered the following data:Debt The firm can raise debt by selling $1,000-par-value, 10% coupon interest rate, 10-year bonds on which annual interest payments will be made. To sell the issue, anaverage discount of $30 per bond must be given. The firm must also pay flotation costsof $20 per bond.Preferred stock The firm can sell 11% (annual dividend) preferred stock at its $100-per-share par value. The cost of issuing and selling the preferred stock is expected to be $4per share.Common stock The firm’s common stock is currently selling for $80 per share. The firmexpects to pay cash dividends of $6 per share next year. The firm’s dividends have beengrowing at an annual rate of 6%, and this rate is expected to continue in the future. Thestock will have to be underpriced by $4 per share, and flotation costs are expected toamount to $4 per share.Retained…arrow_forward
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