Bundle: Contemporary Financial Management, 14th + MindTap Finance, 1 term (6 months) Printed Access Card
14th Edition
ISBN: 9781337587563
Author: MOYER, R. Charles; McGuigan, James R.; Rao, Ramesh P.
Publisher: Cengage Learning
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Chapter 12, Problem 8P
Summary Introduction
To compute: The weighted cost of capital of company E.
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The Ewing Distribution Company is planning a $240 million expansion of its chain of discount service stations to several neighboring states. This expansion will be financed, in part, with debt issued with a coupon interest rate of 16 percent. The bonds have a 15-year maturity and a $1,000 face value, and they will be sold to net Ewing $973 after issue costs. Ewing’s marginal tax rate is 40 percent.Preferred stock will cost Ewing 14 percent after taxes. Ewing’s common stock pays a dividend of $6 per share. The current market price per share is $18, and new shares can be sold to net $17 per share. Ewing’s dividends are expected to increase at an annual rate of 7 percent for the foreseeable future. Ewing expects to have $60 million of retained earnings available to finance the expansion.Ewing’s target capital structure is as follows:
Debt
40
%
Preferred stock
5
Common equity
55
Calculate the weighted cost of capital that is appropriate to use in evaluating this…
Sincere Stationary Corporation needs to raise $500,000 to improve its manufacturing plant. It has decided to issue a $1,000 par value bond with an annual coupon rate 10.0 percent with interest paid semiannually and a 10-year maturity. Investors require a return of 9.0 percent.
A. Compute the market value of the bonds
B. How many bonds will the firm have to issue to receive the needed funds
C. What is the firms after-tax cost of debt if the firms tax rate is 34 percent
8. The Ewing Distribution Company is planning a $100 million expansion of its chain
of discount service stations to several neighboring states. This expansion will be
financed, in part, with debt issued with a coupon interest rate of 15 percent. The
bonds have a 10-year maturity and a $1,000 face value, and they will be sold to net
Ewing $990 after issue costs. Ewing's marginal tax rate is 40 percent.
Preferred stock will cost Ewing 14 percent after taxes. Ewing's common stock
pays a dividend of $2 per share. The current market price per share is $15, and
new shares can be sold to net $14 per share. Ewing's dividends are expected to
increase at an annual rate of 5 percent for the foreseeable future. Ewing expects to
have $20 million of retained earnings available to finance the expansion.
Ewing's target capital structure is as follows:
INTERMEDIATE
Debt
20%
Preferred stock
Common equity
75
Calculate the weighted cost of capital that is appropriate to use in evaluating this
expansion…
Chapter 12 Solutions
Bundle: Contemporary Financial Management, 14th + MindTap Finance, 1 term (6 months) Printed Access Card
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