(Weighted average cost of capital) The target capital structure for QM Industries is 45% common stock, 6% preferred stock, and 49% debt. If the cost of common equity for the firm is 17.9%, the cost of preferred stock is 10.6%, the before-tax cost of debt is 8.9%, and the firm’s tax rate is 35%, what is QM’s weighted average cost of capital?
QM’s WAAC is _%?
2).(Weighted average cost of capital)Crypton Electronics has a capital structure consisting of 45% common stock and 55% debt. A debt issue of $1,000 par value, 6.1% bonds that mature in 15 years and pay annual interest will sell for $980. Common stock of the firm is currently selling for $29.76 per share and the firm expects to pay a $2.29 dividend next year. Dividends have grown at
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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 area is interested in financing the startup company and two financing plans have been put forth for consideration:
• Plan A is an all-common-equity structure in which $2.4 million dollars would be raised by selling common stock at $10 per common share.
• Plan B would involve the use of financial leverage. $1.4 million dollars would be raised by selling bonds with an effective interest rate of 11.3% (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 35% tax rate is deemed appropriate for the analysis.
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.)
B). A detailed financial analysis of the firm’s prospects suggests that the long-term EBIT will be above $344,000 annually. Taking this into consideration, which plan will generate the higher EPS?
Complete the segment of the income statement for Plan A below. (Round income statement amounts to the
Our company will plan to finance our strategy principally through issuing stock and cash flows from operating activities generated from the company’s normal business functions. It is undesirable for our strategy to issue debt because we would like to stay away from interest payments. Our company anticipates our debt to equity leverage ratio to be around 0.5.
The weighted average cost of capital is the rate that a company is expected to pay on average to all its security holders to finance its assets.
Given that the cost of equity is 9.4% and the cost of debt is 12.2%, Star’s cost of capital can be calculated as 9.14% (Appendix B). The company was also considering raising the cost of debt to the industry average of 19%. At this cost of debt, Star Company would have a lower cost of capital of 8.24% (Appendix B) because interest on debt capital is deductible whereas dividend payments on equity capital are not.
Three interrogations were thus to answer. Should the company provide investors with classic bonds or give them the opportunity to convert them into equity? Should they structure the offer with a fixed or a floating coupon rate? And last but not least, where should they locate the operation?
a) In the first set of calculations, the staff used a discount rate of 20%, a five-year time horizon, and ignored taxes and terminal value. What is the relative attractiveness of these three alternatives?
Based on the suggestion that the focus should be on market values, compute the weights of debt, preferred stock, and common stock.
Acme Mfg currently is all-equity financed, with 2 mm shares outstanding at a current price of $40/sh. The firm announces they will raise $8 mm by issuing new equity to fund a new project (assume investors expect the NPV of the new project is 0).
-Martin Industries just paid an annual dividend of $1.30 a share. The market price of the stock is $36.80 and the growth rate is 6.0 percent. What is the firm's cost of equity?
The mixture of debt-equity mix is important so as to maximize the stock price of the Costco. However, it will be significant to consider the Weighted Average Cost of Capital (WACC) as well so that it can evaluate the company targeted capital structure. Cost of capital (OC) may be used by the companies as for long term decision making, so industries that faced to take the important of Cost of capital seriously may not make the right choice by choosing the right project(Gitman’s, ).
WACC = Cost of Debt X proportion of debt + Cost of Preferred Stock X Proportion of preferred stock + Cost of equity X proportion of equity
Moreover, let’s calculate the Weighted Average Cost of Capital (WACC). And in order to calculate it we need to know the capital structure of the company. Knowing the capital structure of the
Corporate Finance ADM 3350 M & P (Winter 2015) Assignment 1 Due Date: February 23, 2015 Question 1 (5 Marks) Varta Inc. has just issued a dividend of $1.50 per share on its common stock. The company paid dividends of $1.10, $1.15, $1.25, and $1.37 per share in the last four years. The stock currently sells for $48. a. What is your best estimate of the company's cost of equity capital using the arithmetic average growth rate in dividends? b. What if you use the geometric average growth rate? Solution: (3 + 2 = 5 Marks)
Weights of Debt and equity are 8.3 and 91.7%. Now, plugging all the values in, we can derive company’s Weighted Average Cost of Capital.
Ahina Industries is a division of a major corporation. Data concerning the most recent year appears below: