EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN: 9781337514835
Author: MOYER
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Chapter 12, Problem 17P
Summary Introduction
To determine: The weighted cost of capital.
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Xavier Manufacturing Company has determined its optimal capital structure, which is composed of the following sources and target market value proportions:
Target Market - Source of Capital Proportions
Long-term debt 35%
Preferred stock 5%
Common stock equity 60%
Debt: The firm plans to issue a 20-year, $1,000 par value, 6%(percent) bond. A flotation cost of 3% (percent) of the face value would be required.
Preferred Stock: The firm has determined it can issue preferred stock at $70 per share par value. The stock will pay an $8.00 annual dividend. The cost of issuing and selling the preferred stock will be $3 per share.
Common Stock: The firm’s common stock is currently selling for $40 per share. The dividend expected to be paid at the end of the coming year is $5.00. Its dividend payments have been growing at a constant rate for the last five years at a rate of 5%.
In order to assure that the new stock issuance will sell,…
Jenkins Resources Inc. has the following capital structure:
Financing Source
Proportion of Capital Structure
Debentures (8% coupon, $1,000 par value, 13 year maturity)
29
%
Preferred stock ($3 dividend, $35 par value)
5
Common equity
66
Total
100
%
Jekins expects to raise future capital in the proportions currently indicated on the balance sheet. The current market price for Jenkins debentures is $1,177. If new debentures were sold, the issuance cost would be $43 per bond. The current market price for the preferred stock is $19. Issuance costs on new preferred stock would be $3 per share for a $35 par value issue. Issuance costs on new equity would be $2.5 per share. The current market price for Jenkins common stock is $40. The stock pays a current (D0) dividend of $5. This dividend is expected to grow at an annual rate of 8 percent. What is the weighted (marginal) cost of capital for Jenkins Resources, assuming new capital is…
Having successfully issued their preference shares, Micron Industries is seeking to determine its Weighted Average Cost of Capital, so that it can be used as the company’s required return in evaluating upcoming capital projects. Utilising information from Micron Industries’ financial statements, presented on page 1, together with current information, the company has the following capital structure:
Debt: Bonds outstanding has a face value of $90,000,000, currently selling at 98% of par. The coupon rate on these bonds is 9% paid semi-annually and there is 12 years left to maturity. (Hint: you can use the lowest multiple of $1,000 for the YTM calculation only)
Common stock: 144,000,000 shares of common stock outstanding with a market price of $27.30.
Preferred stock: 100,000,000 shares of preferred shares outstanding with a market price of $60. The annual dividend is $4.50.Page 4 of 6
Additional Information: The Company’s tax rate is 35%. The current risk free rate is 3.50%; The…
Chapter 12 Solutions
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Ch. 12 - Prob. 1QTDCh. 12 - Prob. 2QTDCh. 12 - Prob. 3QTDCh. 12 - Prob. 4QTDCh. 12 - Prob. 5QTDCh. 12 - Prob. 6QTDCh. 12 - Prob. 7QTDCh. 12 - Prob. 8QTDCh. 12 - Prob. 9QTDCh. 12 - Prob. 10QTD
Ch. 12 - Prob. 11QTDCh. 12 - Prob. 12QTDCh. 12 - Prob. 13QTDCh. 12 - Prob. 1PCh. 12 - Prob. 2PCh. 12 - Prob. 3PCh. 12 - Prob. 4PCh. 12 - Prob. 5PCh. 12 - Prob. 6PCh. 12 - Prob. 7PCh. 12 - Prob. 8PCh. 12 - Prob. 9PCh. 12 - Prob. 10PCh. 12 - Prob. 11PCh. 12 - Prob. 12PCh. 12 - Prob. 13PCh. 12 - Prob. 14PCh. 12 - Prob. 15PCh. 12 - Prob. 16PCh. 12 - Prob. 17PCh. 12 - Prob. 18PCh. 12 - Prob. 19PCh. 12 - Prob. 20PCh. 12 - Prob. 21PCh. 12 - Prob. 22PCh. 12 - Prob. 23PCh. 12 - Prob. 24PCh. 12 - Prob. 26P
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