Question

Honda is considering increasing production after unexpected strong demand for its new motorbike. To evaluate the...

Honda is considering increasing production after unexpected strong demand for its new motorbike. To evaluate the proposal, the company needs to calculate its cost of capital. You've collected the following information:

  • The company wants to maintain is current capital structure, which is 60% equity, 20% preferred stock and 20% debt.
  • The firm has marginal tax rate of 34%.
  • The firm's preferred stock pays an annual dividend of $4.3 forever, and each share is currently worth $135.26.
  • The firm has one bond outstanding with a coupon rate of 6%, paid semiannually, 10 years to maturity, a face value of $1,000, and a current price of $1,163.51.
  • Honda's beta is 0.6, the yield on Treasury bonds is is 1.2% and the expected return on the market portfolio is 6%.
  • The current stock price is $48.19. The firm has just paid an annual dividend of $1.39, which is expected to grow by 4% per year.
  • The firm uses a risk premium of 3% for the bond-yield-plus-risk-premium approach.
  • New preferred stock and bonds would be issued by private placement, largely eliminating flotation costs. New equity would come from retained earnings, thus eliminating flotation costs.

What is the cost of equity using the bond yield plus risk premium?

What is your best guess for the cost of equity if you think all three approaches are equally valid?

What is the company's weighted average cost of capital?

Homework Answers

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Rollins Corporation is estimating its WACC. Its target capital structure is 20 percent debt, 20 percent...
Rollins Corporation is estimating its WACC. Its target capital structure is 20 percent debt, 20 percent preferred stock, and 60 percent common equity. Its bonds have a 12 percent coupon, paid semiannually, a current maturity of 20 years, and sell for $1,000. The firm could sell, at par, $100 preferred stock which pays a 12 percent annual dividend, but flotation costs of 5 percent would be incurred. Rollins' beta is 1.2, the risk-free rate is 10 percent, and the market...
Given the following data: • The firm’s marginal tax rate is 21%. • The current price...
Given the following data: • The firm’s marginal tax rate is 21%. • The current price of the corporation’s 10% coupon, semiannual payment, noncallable bonds with 15 years remaining to maturity is $1,011.55. The company does not use short-term interest-bearing debt on a permanent basis. New bonds would be privately placed with no flotation cost. • The current price of the firm’s 10%, $100 par value, quarterly dividend, perpetual preferred stock is $110.12. The company would incur flotation costs of...
BearKat wants to build a new assembly line to improve productivity. It is expected to generate...
BearKat wants to build a new assembly line to improve productivity. It is expected to generate a return of 17%. Sammy wants to know what he should use for his hurdle rate or WACC (weighted average cost of capital). Sammy’s accountant provides you the following information. Common stock is selling for $73 a share. The current annual dividend is $2.36 and the growth rate is expected to be 2% a year. The stock’s beta is 1.77. Preferred stock sells for...
Rollins Corporation is estimating its WACC.  Its only bond issue has a 6.07 percent annual yield to...
Rollins Corporation is estimating its WACC.  Its only bond issue has a 6.07 percent annual yield to maturity, par value of $1,000, mature in 20 years, and has a 5.2% coupon paid semiannually (2.6%).  There is $100 million total par value of debt outstanding.  The firm currently has a $100 par preferred stock that pays a 7.5 percent annual dividend and currently yields 6 percent.  Flotation costs of 5 percent must be incurred on any new issue of preferred.  Current outstanding preferred stock has a...
Can you do in excel Rollins Corporation is estimating its WACC.  Its only bond issue has a...
Can you do in excel Rollins Corporation is estimating its WACC.  Its only bond issue has a 6.07 percent annual yield to maturity, par value of $1,000, mature in 20 years, and has a 5.2% coupon paid semiannually (2.6%).  There is $100 million total par value of debt outstanding.  The firm currently has a $100 par preferred stock that pays a 7.5 percent annual dividend and currently yields 6 percent.  Flotation costs of 5 percent must be incurred on any new issue of preferred.  Current...
Can you do in excel Rollins Corporation is estimating its WACC.  Its only bond issue has a...
Can you do in excel Rollins Corporation is estimating its WACC.  Its only bond issue has a 6.07 percent annual yield to maturity, par value of $1,000, mature in 20 years, and has a 5.2% coupon paid semiannually (2.6%).  There is $100 million total par value of debt outstanding.  The firm currently has a $100 par preferred stock that pays a 7.5 percent annual dividend and currently yields 6 percent.  Flotation costs of 5 percent must be incurred on any new issue of preferred.  Current...
can you use excel Rollins Corporation is estimating its WACC.  Its only bond issue has a 6.07...
can you use excel Rollins Corporation is estimating its WACC.  Its only bond issue has a 6.07 percent annual yield to maturity, par value of $1,000, mature in 20 years, and has a 5.2% coupon paid semiannually (2.6%).  There is $100 million total par value of debt outstanding.  The firm currently has a $100 par preferred stock that pays a 7.5 percent annual dividend and currently yields 6 percent.  Flotation costs of 5 percent must be incurred on any new issue of preferred.  Current outstanding...
Can you use Excel Rollins Corporation is estimating its WACC.  Its only bond issue has a 6.07...
Can you use Excel Rollins Corporation is estimating its WACC.  Its only bond issue has a 6.07 percent annual yield to maturity, par value of $1,000, mature in 20 years, and has a 5.2% coupon paid semiannually (2.6%).  There is $100 million total par value of debt outstanding.  The firm currently has a $100 par preferred stock that pays a 7.5 percent annual dividend and currently yields 6 percent.  Flotation costs of 5 percent must be incurred on any new issue of preferred.  Current outstanding...
can you use excel Rollins Corporation is estimating its WACC.  Its only bond issue has a 6.07...
can you use excel Rollins Corporation is estimating its WACC.  Its only bond issue has a 6.07 percent annual yield to maturity, par value of $1,000, mature in 20 years, and has a 5.2% coupon paid semiannually (2.6%).  There is $100 million total par value of debt outstanding.  The firm currently has a $100 par preferred stock that pays a 7.5 percent annual dividend and currently yields 6 percent.  Flotation costs of 5 percent must be incurred on any new issue of preferred.  Current outstanding...
The stock of Gao Computing sells for $50, and last year's dividend was $3.13. Security analysts...
The stock of Gao Computing sells for $50, and last year's dividend was $3.13. Security analysts are projecting that the common dividend will grow at a rate of 7% a year. A flotation cost of 10% would be required to issue new common stock. Gao's preferred stock sells for $32.61, pays a dividend of $3.30 per share, and new preferred stock could be sold with a flotation cost of 8%. The firm has outstanding bonds with 20 years to maturity,...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT