Business Capital

Question description

(Weighted Average cost of capital) The target capital
stricture fo QM industries is 41% common stock 10% preferred stock, and 49% if
the common cost equity for the firm is 18.6% the cost of preferred stock is
9.2% but before tax cost is 7.7% and the firms tax rates is 35% what is QM’s
weighted average cost of capital.

QM’s wacc is : _________% (Round to three decimals)

2) (Weighted average cost of the capital) Crypton
Electronics has a capital structure consisting of 37% common stock and 63%
debt. A debt issue of $1,000 par value, 5.8% bonds that mature in 15 years and
pay per annual interest will sell for $971. Common stock of the firm is
currently selling for 30.65 per share and the firm expected to pay a $2.34
dividend next year. Dividends have grown at the rate of 5.2% per year and are
expected to continue to do so for the foreseeable future. what is Crypton’s
cost of capital where the firm’s tax rate is 30%

Crypton’s cost of capital is:________% (Round to three
decimal places).

3) (Weighted cost of capital) The target capital structure
for Jowers Manufacturing is 49% common stock, 20% preferred stock, and 31%
debt. If the cost of common equity for the firm is 20.4%, the cost of preferred
stock is 11.4%, and the before tax cost of debt is 9.2%, What is Jowers cost of
capital? The firm’s tax rate is 34%

Jower’s WACC is:_______% (Round to three decimal places).

4) (Weighted average cost of capital) As a member of the
finance department of ranch manufacturing, your supervisor has asked you to
compute the appropriate discount rate to use when evaluating the purchase of
new packing equipment for the plant. Under the assumption that the firm’s
present capital structure reflects the appropriate mix of capital sources for
the firm, you have determined the market value of the firm’s capital structure
as follows. To finance the purchase, Ranch manufacturing will sell 10 year
bonds paying 6.9% per year at the market price of $1,057. Preferred stock
paying a $1.96 dividend can be sold for $25.68. Common stock for ranch
manufacturing is currently selling for $54.82 per share and the firm paid a
$3.08 dividend last year. Dividends are expected to continue growing at a rate
of 4.6 per year into the indefinite future. If the firm’s tax rate is 30% what
discount rate should you use to evaluate the equipment purchase?

Ranch Manufacturing’s WACC is:_______% (Round to three
decimal places)

5) (Related to checkpoint
15.2)(EBIT-EPS analysis) Abe forrester and three of his friends from college
have interested a group of venture capitalists in backing their business idea.
The proposed operation would consist of a series of retail outlets to
distribute and service a full line of vaccum cleaners and accessories . These
stores would be located in Dallas, Houston, and San Antonio. To finance the new
venture two plans have been proposed:
Plan A is an all- common- equity structure in
which $2.5 million dollars would be raised by selling 80,000 shares of common
stock.

Plan B would involve issuing $1.4 million
dollars in long-term bonds with an effective interest rate of 12.1% plus $1.1
million would be raised by selling 40,000 shares of common stock. The debt
funds raised under plan B have no fixed maturity date, in that this amount of
financial leverage is considered a permanent part of the firm’s capital
structure. Abe and his partners plan to use a 34% tax rate in their analysis,
and they have hired you on a consulting basis to do the following:

a. Find the EBIT
indifference level associated with the two financing plans.

b. Prepare a pro forma
income statement for the EBIT level solved for in part a. that   shows EPS will be the same regardless
whether Plan A or B is chosen.

a. Find the EBIT indifference level associated with the two financing
plans.

-The EBIT indifference level
associated with the two financing plans is: $______ (Round to the nearest
dollar).

6) (EBIT-EPS analysis) Three recent graduates of the computer science
program at the University of Tennessee are forming a company that will write
and distribute new application software for the iPhone. Initially, the
corporation will operate in the southern region of Tennessee, Georgia, North
Carolina, and South Carolina. A small group of private investors in the
Atlanta, Georgia are is interested in financing the startup company and two
financing the startup company and two financing plans have been put forth for
consideration:The first (Plan A) is an all-common-equity
capital structure. $2.1 million dollars would be raised by selling common stock
at $10 per common share.Plan B would involve the use of financial
leverage. $1.1 million dollars would be raised by selling bonds with an
effective interest rate of 10.8% (per annum), and the remaining $1.0 million
would be raised by selling common stock at the $10 price per share. The use of
financial leverage is considered to be a permanent part of the firm’s
capitalization, so no fixed maturity date is needed for the analysis.

a. Find the EBIT indifference level associated with the two financing
plans.

b. A detailed financial analysis of the firm’s prospects suggests that
the long-term EBIT will be above $314,000 annually. Taking this into
consideration, which plan will generate the higher EPS?

a. Find the EBIT indifference level associated with the two financing
plans.

-The EBIT indifference level associated
with the two financing plans is: $_____(Round to the nearest dollar.)