Question

Assume that you are an intern with the Brayton Company, and you have collected the following data: The company’s10-year $1,000 par bond with coupon rate of 6% coupon is currently sold for $855 anf flotation cost of $14; its tax rate is 40%; the next expected dividend is $0.65 a share; the dividend is expected to grow at a constant rate of 6.00% a year; the price of the stock is $15.00 per share; the flotation cost for selling new shares is F = 10% of price; and the target capital structure is 45% debt and 55% common equity. Brayton does not raise fund through preferred stocks.

a) What is the bond's cost of capital?

b) What is the cost of retained earnings?

c) What is the cost of issuing new common stocks?

d) What is the firm's WACC when it raises funds for financing
through debt and retained earnings?

e) What is the firm's WACC when it raises funds for financing
through s debt and new shares of commons stock?

Answer #1

Assume that you are an intern with the Brayton Company, and you
have collected the following data: The yield on the company's
outstanding bonds is 8.25%; its tax rate is 25%; the next expected
dividend is $0.75 a share; the dividend is expected to grow at a
constant rate of 5.00% a year; the price of the stock is $14.00 per
share; the flotation cost for selling new shares is F = 5%; and the
target capital structure is 40%...

Edna Recording Studios, Inc., reported earnings available to
common stock of $4,400,000 last year. From those earnings, the
company paid a dividend of $1.33 on each of its 1,000,000 common
shares outstanding. The capital structure of the company includes
35% debt, 20% preferred stock, and 45% common stock. It is
taxed at a rate of 40%.
a. If the market price of the common stock is $50
and dividends are expected to grow at a rate of 6% per year...

Assume that you are on the financial staff of Vanderheiden Inc.,
and you have collected the following data: The yield on the
company’s outstanding bonds is 7.75%, its tax rate is 25%, the next
expected dividend is $0.65 a share, the dividend is expected to
grow at a constant rate of 6.00% a year, the price of the stock is
$14.00 per share, the flotation cost for selling new shares is F =
10%, and the target capital structure is...

Assume that you are on the financial staff of Vanderheiden Inc.,
and you have collected the following data: The yield on the
company’s outstanding bonds is 7.75%, its tax rate is 40%, the next
expected dividend is $0.65 a share, the dividend is expected to
grow at a constant rate of 6.00% a year, the price of the stock is
$16.00 per share, the flotation cost for selling new shares is F =
10%, and the target capital structure is...

Cost of capital
Edna Recording Studios, Inc., reported earnings available to
common stock of $4,000,000 last year. From those earnings, the
company paid a dividend of $1.15 on each of its 1,000,000 common
shares outstanding. The capital structure of the company includes
35% debt, 15% preferred stock, and 50% common stock. It is
taxed at a rate of 27%.
a. If the market price of the common stock is $40 and dividends
are expected to grow at a rate of...

which of the following statements with respect to the WACC is
correct?
a. retained earnings are not included in the wacc since they
provide free finds to any company
b. none are correct
c. flotation costs are included in the wacc if the company uses
internal funds (retained earnings) but are irrelevant if the
company relies on external funds (new common stock)
d. the required rate of return on outstanding common stocks is a
reasonable estimate of the cost of...

Assume that you are on the financial staff of Vanderheiden Inc.,
and you have collected the following data: The yield on the
company’s outstanding bonds is 7.75%, its tax rate is 40%, the next
expected dividend is $0.65 a share, the dividend is expected to
grow at a constant rate of 6.00% a year, the price of the stock is
$15.00 per share, the flotation cost for selling new shares is F =
10%, and the target capital structure is...

McGee Corporation needs to calculate its marginal cost of
capital. You are a financial analyst for the company and have
gathered the following information:
Dividend, preferred stock……………………….......... …………..$6.00
Dividend, next expected, Common Stock……….......... ………..$1.10
Price, Preferred Stock (ignore any flotation cost)…..........
……$48.00
Price, Common Stock………………………………….......... …..$25.00
Flotation cost per share, common........................ 20% of
stock price
Growth rate…………………………………………….......... ………10%
Bond yield........... …………………………………………………….11%
Bond face .......... ………………………………………………$1,000.00
Net income…………………………………………….... …….$25 million
Dividend...

Edna Recording Studios, Inc., reported earnings available to
common stock of
$4 comma 400 comma 0004,400,000
last year. From those earnings, the company paid a dividend
of
$1.251.25
on each of its
1 comma 000 comma 0001,000,000
common shares outstanding. The capital structure of the company
includes
2525%
debt,
2020%
preferred stock, and
5555%
common stock. It is taxed at a rate of
2424%.
a. If the market price of the common stock is
$4545
and dividends are expected to...

Instructions: You are required to use a financial calculator or
spreadsheet (Excel) to solve 10 problems related to the cost of
capital. You are required to show the following 3 steps for each
problem: (i) Describe and interpret the assumptions related to the
problem. (ii) Apply the appropriate mathematical model to solve the
problem. (iii) Calculate the correct solution to the problem. Round
all answers to two decimal places.
1. CosaNostra Pizza is undergoing a major expansion. The
expansion will...

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