Contemporary Financial Management
14th Edition
ISBN: 9781337090582
Author: R. Charles Moyer, James R. McGuigan, Ramesh P. Rao
Publisher: Cengage Learning
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Chapter 6, Problem 27P
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To determine: Whether person X would purchase these debentures.
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Stardom Manufacturing Company (SMC) is in the construction industry for many years. Recently, the issue of financing has been raised since the company is concerned about additional financing of the company and the sources of funding. A recent audit of the company’s financial position has indicated the following details:
The company has acquired a bond at face value with an interest rate of 10%.
The can issue new Preference shares at $7.50 per share and offer dividend of $75 per share.
The ordinary shares of Stardom has a market value of $60 per share and the firm is expecting to pay dividend of $4.50 per share one year later with anticipated growth rate of dividend of 6%.
The company’s tax rate is 40%.
TASK 1: using the above information help the financial controller to calculate:
The cost of Debt financing after tax.
The cost of Ordinary Share financing.
The cost of Preference Shares financing.
Stardom Manufacturing Company (SMC) is in the construction industry for many years. Recently, the issue of financing has been raised since the company is concerned about additional financing of the company and the sources of funding. A recent audit of the company’s financial position has indicated the following details:
The company has acquired a bond at face value with an interest rate of 10%.
The can issue new Preference shares at $7.50 per share and offer dividend of $75 per share.
The ordinary shares of Stardom has a market value of $60 per share and the firm is expecting to pay dividend of $4.50 per share one year later with anticipated growth rate of dividend of 6%.
The company’s tax rate is 40%.
TASK 1: using the above information help the financial controller to calculate:
The cost of Debt financing after tax.
The cost of Ordinary Share financing.
The cost of Preference Shares financing.
TASK 2: Using information above, what is the weighted average cost of…
The table below shows a book balance sheet for the Wishing Well Motel chain. The company's long-term debt is secured by its real
estate assets, but it also uses short-term bank loans as a permanent source of financing. It pays 13% interest on the bank debt and
10% interest on the secured debt. Wishing Well has 10 million shares of stock outstanding, trading at $82 per share. The expected
return on Wishing Well's common stock is 21%. (Table figures in $ millions.)
Cash and marketable securities
24
Bank loan
$4
100
270
Accounts payable
Accounts receivable
130
170
Current liabilities
Inventory
50
400
Current assets
320
Long-term debt
Equity
Real estate
1,800
1,440
Other assets
120
400
$ 2,240
$ 2,240
Total
Total
Calculate Wishing Well's WACC. Assume that the book and market values of Wishing Well's debt are the same. The marginal tax rate
is 21%. (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.)
Weighted-average cost of capital
Chapter 6 Solutions
Contemporary Financial Management
Ch. 6 - Prob. 1QTDCh. 6 - Prob. 2QTDCh. 6 - Prob. 3QTDCh. 6 - Prob. 4QTDCh. 6 - Prob. 5QTDCh. 6 - Prob. 6QTDCh. 6 - Prob. 7QTDCh. 6 - Prob. 8QTDCh. 6 - Prob. 9QTDCh. 6 - Prob. 11QTD
Ch. 6 - Prob. 12QTDCh. 6 - Prob. 13QTDCh. 6 - Prob. 14QTDCh. 6 - Prob. 15QTDCh. 6 - Prob. 16QTDCh. 6 - Prob. 17QTDCh. 6 - Prob. 1PCh. 6 - Prob. 2PCh. 6 - Prob. 3PCh. 6 - Prob. 4PCh. 6 - Prob. 5PCh. 6 - Prob. 6PCh. 6 - Prob. 7PCh. 6 - Prob. 8PCh. 6 - Prob. 9PCh. 6 - Prob. 10PCh. 6 - Prob. 11PCh. 6 - Prob. 12PCh. 6 - Prob. 13PCh. 6 - Prob. 14PCh. 6 - Prob. 15PCh. 6 - Prob. 16PCh. 6 - Prob. 17PCh. 6 - Prob. 18PCh. 6 - Prob. 19PCh. 6 - Prob. 20PCh. 6 - Prob. 21PCh. 6 - Prob. 22PCh. 6 - Prob. 23PCh. 6 - Prob. 24PCh. 6 - Prob. 25PCh. 6 - Prob. 26PCh. 6 - Prob. 27P
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