Barbow Enterprises, Inc., is considering an expansion in their operations. One of the first items they want to examine is their cost of capital. According to the accounting department, the following items and their respective costs have been identified:
•The cost of Common Equity: 15%
•The before tax cost of debt: 12%
•No Preferred stock
They have also calculated the marginal tax rate to be 40% and the stock sells at its book value.
Barbow Enterprises Inc.
Balance Sheet
Assets
Liabilities and Owners’ Equity
Cash $240
Long Term Debt $2,304
Accounts Receivable 480
Equity 3,456
Inventories 720
Net P&E 4,320
Total Assets $5,760
Total Liabilities and owners’ Equity $5,760
Required:
Calculate Barbow’s after-tax weighted average cost of capital, using the data in the balance sheet above.
Deliverable:
Submit the completed assignment to the W4: Assignment 2 Dropbox. Use a Microsoft Excel spreadsheet that illustrates your calculations. You may use the formulas embedded in Microsoft Excel and/or a financial calculator for these calculations.
Name your document SU_FIN2030_W4_A2_part1_LastName_FirstInitial.
Part Two: Final Project 3: Government Securities
In this part of your Final Project, you will research and analyze current information (that is, within the past two months) on government securities.
Step 1: Go to a financial Web site to do your research. The following are three suggested sites, but you may use others. Be sure to cite your sources!
•finance.yahoo.com
•http://www.google.com/finance
•moneycentral.msn.com
Step 2: Research current information (within the last two months) on the yields and maturity for:
1.U.S. treasuries
2.Municipal bonds
3.Corporate bonds
Required:
•Discuss what the pure expectations theory would imply about the yield curve.
•Compare and contrast the yields and maturities for each of the securities.
•Discuss which you would hold and why relative to interest rate risk.
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