EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN: 9781337514835
Author: MOYER
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Chapter 12, Problem 17P
Summary Introduction
To determine: The weighted cost of capital.
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To assist with evaluating potential capital projects, Insignia Corporation Limited is seeking to determine its Weighted Average Cost of Capital.
Utilising information from the financial statements, the company has the following capital structure:
Debt: Bonds outstanding has a face value of $835,000,000, currently selling at 105% of par. The coupon rate on these bonds is 9% and there is 10 years left to maturity. (Hint: you can use the lowest multiple of $1,000 for the YTM calculation only)
Common stock: 13,000,000 shares of common stock outstanding with a market price of $60.00.
The company has no preference shares outstanding.
Additional Information:
The Company’s tax rate is 30%.
The current risk free rate is 3.50%; market return is 8%.
The Company’s beta is 2.50.
Required: Calculate the Weighted Average Cost of Capital for Insignia Corporation Limited.
IRIS Corp. has determined its optimal capital structure as follows.
Debt: The firm can sell a 10-year, $1,000 par value, 7 percent bond for $950. A flotation cost of 3percent of the par value would be required in addition to the discount of $50. Preferred Stock: The firm has determined it can issue preferred stock at $45 per share par value. The stock will pay an $6.5 annual dividend. The cost of issuing and selling the stock is $2.5 per share. Common Stock: The firm's common stock is currently selling for $25 per share. The dividend expected to be paid at the end of the coming year is $3.75. Its dividend payments have been growing at a constant rate for the last five years. Five years ago, the dividend was $1.45. It is expected that to sell, a new common stock issue must be underpriced at $2 per share and the firm must pay $0.75 per share in flotation costs. Additionally, the firm's marginal tax rate is 20 percent. Calculate the firm's weighted average cost of capital assuming the…
A firm has determined its optimal capital structure, which is composed of the following sources and target market value proportions:
Debt: The firm can sell a 20-year, $1,000 par value, 9 percent bond for $980. A flotation cost of 2 percent of the face value would be required in addition to the discount of $20.
Preferred Stock: The firm has determined it can issue preferred stock at $65 per share par value. The stock will pay an $8.00 annual dividend. The cost of issuing and selling the stock is $3 per share.
Common Stock: The firm's common stock is currently selling for $40 per share. The dividend expected to be paid at the end of the coming year is $5.07. Its dividend payments have been growing at a constant rate for the last five years. Five years ago, the dividend was $3.45. It is expected that to sell, a new common stock issue must be underpriced at $1 per share and the firm must pay $1 per share in flotation costs. Additionally, the firm's marginal tax rate is 40 percent.…
Chapter 12 Solutions
EBK CONTEMPORARY FINANCIAL MANAGEMENT
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