Principles of Managerial Finance (14th Edition) (Pearson Series in Finance)
14th Edition
ISBN: 9780133507690
Author: Lawrence J. Gitman, Chad J. Zutter
Publisher: PEARSON
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Chapter 9, Problem 9.1STP
Learning Goals 3, 4, 5, 6
ST9-1 Individual financing costs and WACC Humble Manufacturing is interested in measuring its overall cost of capital. The firm is in the 40% tax bracket. The company’s financial analysts have 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. When these bonds are issued, their market price will be $970. The firm must also pay flotation costs of $20 per bond.
Common stock The firm’s common stock is currently selling for $80 per share. The firm expects to pay cash dividends of $6 per share next year. The firm's dividends have been growing at an annual rate of 6%, and this growth will continue in the future. The stock will have to be underpriced by $4 per share, and flotation costs amount to $4 per share.
- a. Calculate the individual cost of each source of financing. (Round to the nearest 0.1 %.)
- b. Calculate the firm’s weighted average cost of capital (WACC) using the weights shown in the following table, which are based on the firm's target capital structure proportions. (Round to the nearest 0.1%.)
| Source of capital | Weight |
| Long-term debt | 40% |
| Preferred stock | 15 |
| Common stock equity | 45 |
| Total | 100% |
- c. In which, if any, of the investments shown in the following table do you recommend that the firm invest? Explain your answer. How much new financing is required?
| Investment opportunity | Expected |
Initial investment | |
| A | 11.2% | $100,000 | |
| B | 9.7 | 500,000 | |
| C | 12.9 | 150,000 | |
| D | 16.5 | 200,000 | |
| E | 11.8 | 450,000 | |
| F | 10.1 | 600,000 | |
| G | 10.5 | 300,000 |
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Chapter 9 Solutions
Principles of Managerial Finance (14th Edition) (Pearson Series in Finance)
Ch. 9.1 - Prob. 1FOECh. 9.1 - What is the cost of capital?Ch. 9.1 - Prob. 9.2RQCh. 9.1 - Prob. 9.3RQCh. 9.1 - What are the typical sources of long-term capital...Ch. 9.2 - Prob. 9.5RQCh. 9.2 - Prob. 9.6RQCh. 9.2 - Prob. 9.7RQCh. 9.3 - How would you calculate the cost of preferred...Ch. 9.4 - What premise about share value underlies the...
Ch. 9.4 - How do the constant-growth valuation model and...Ch. 9.4 - Why is the cost of financing a project with...Ch. 9.5 - Prob. 1FOPCh. 9.5 - Prob. 9.13RQCh. 9.5 - Prob. 9.14RQCh. 9.5 - Prob. 9.15RQCh. 9 - Prob. 1ORCh. 9 - Learning Goals 3, 4, 5, 6 ST9-1 Individual...Ch. 9 - Prob. 9.1WUECh. 9 - Prob. 9.2WUECh. 9 - Prob. 9.3WUECh. 9 - Weekend Warriors Inc. has 35% debt and 65% equity...Ch. 9 - Oxy Corporation uses debt, preferred stock, and...Ch. 9 - Prob. 9.1PCh. 9 - Prob. 9.2PCh. 9 - Prob. 9.3PCh. 9 - Prob. 9.4PCh. 9 - The cost of debt Gronseth Drywall Systems Inc. is...Ch. 9 - After-tax cost of debt Bella Wans is interested in...Ch. 9 - Prob. 9.7PCh. 9 - Cost of preferred stock Determine the cost for...Ch. 9 - Prob. 9.9PCh. 9 - Prob. 9.10PCh. 9 - Retained earnings versus new common stock Using...Ch. 9 - The effect of tax rate on WACC K. Bell Jewelers...Ch. 9 - WACC: Market value weights The market values and...Ch. 9 - WACC: Book weights and market weights Webster...Ch. 9 - Prob. 9.15PCh. 9 - Cost of capital Edna Recording Studios Inc....Ch. 9 - Prob. 9.17PCh. 9 - Prob. 9.18PCh. 9 - Calculation of individual costs and WACC Lang...Ch. 9 - Weighted average cost of capital (WACC) American...Ch. 9 - Prob. 9.21PCh. 9 - Eco Plastics Company Since its inception, Eco...
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