EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN: 9781337514835
Author: MOYER
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Chapter 12, Problem 3P
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To determine: The after-tax cost of
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Calculate the after-tax cost of preferred stock for Bozeman-Western Airlines Inc. which is planning to sell $10 million of $6.50 cumulative preferred stock to the public at a price of $50 a share. Issuance costs are estimated to be $2 a share. The company has a marginal tax rate of 40 per cent.
Calculate the cost of preferred stock for Ohio Valley Power Company, which is planning to sell $100 million of $3.25 cumulative preferred stock to the public at a price of $25 per share. Flotation costs are $1.00 per share. Ohio Valley has a marginal income tax rate of 40%. (The answer choice without supporting calculation will not earn any points).
1. Calculate the after-tax cost of preferred stock for Bozeman-Western Airlines, Inc., which is planning to sell $10 million of $8.50 cumulative preferred stock to the public at a price of $50 a share. Issuance costs are estimated to be $4 a share. The company has a marginal tax rate of 40 percent.
2. The Hartley Hotel Corporation is planning a major expansion. Hartley is financed 100% with equity and intends to maintain this capital structure after the expansion. Hartley's beta is 0.90. The expected market return is 16% and the risk-free rate is 10%. If the expansion is expected to produce an internal rate of return of 17%, should Hartley make the investment?
3. Wentworth Industries is 100% equity financed. Its current beta is 0.9. The expected market rate of return is 14% and the risk-free rate is 8%.a. Calculate Wentworth's cost of equity.b. If Wentworth changes its capital structure to 30% debt, it estimates that its beta will increase to 1.1. The after-tax cost of debt will be…
Chapter 12 Solutions
EBK CONTEMPORARY FINANCIAL MANAGEMENT
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- Wandel Inc. has $5,000,000 outstanding of 8 percent preferred stock; the company has a 40 percent tax rate. What is the after-tax cost of the preferred stock? and if Wandel Inc. has forecasted sales of $300,000. The firm's fixed operating costs total $75,000 and its variable operating costs are equal to 70% of this sales level. The company needs to pay $12,000 in interest each period. Its tax rate is 40% and it has 10,000 shares. a) Compute the earnings before interest and taxes (EBIT) for a sales level of $300,000 b) Compute Earnings after taxes and compute the EPS for that sales level.arrow_forwardYou are given the following information for Lighting Power Company. Assume the company's tax rate is 25 percent. Debt: Common stock: 430,000 shares outstanding, selling for $61 per share; the beta is 1.12. 18,500 shares of 3.7 percent preferred stock outstanding, a $100 par value, currently selling for $82 per share. 6 percent market risk premium and 4.7 percent risk-free rate. What is the company's WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g.. 32.16.) Preferred stock: Market: 10,000 5.9 percent coupon bonds outstanding. $1,000 par value, 25 years to maturity, selling for 107 percent of par; the bonds make semiannual payments. WACC %arrow_forwardAssuming an after-tax cost of preferred stock of 10% and a corporate tax rate of 34%, a firm must earn at least $15.15 before tax on every $100 invested. Select one: True O Falsearrow_forward
- A firm is paying an annual dividend of $2.65 for its preferred stock that is selling for $57.00. There is a selling cost of $3.30. What is the after-tax cost of preferred stock if the firm's tax rate is 21%?arrow_forwardInternational Cargo Inc. which is subjected to 20% tax rate employs residual dividend policy to its ordinary shareholders. The expected before tax net income for the year is P2,500,000. The firm will retain a 75% plowback ratio. International Cargo Inc. is funded only by common equity and debt on which the target debt ratio is 60%. Assuming that the shares of International Cargo Inc. has a market price of P35, what is the dividend yield?arrow_forwardYou are given the task of calculating the cost of capital of KaBoom Toy Company. The company faces a tax rate of 40%. The company has 100,000 common shares and 10,000 preferred shares outstanding. Each preferred share has a par value of $60, and is currently priced at 90% of the par value. The preferred shares are paying dividends that total 5% of the par value. You estimate that the beta of the common stock is 1.5. The equity market risk premium is estimated to be 5%, and the risk-free rate is 5%. The company has just paid a dividend of $2 per share. You expect that the dividends will grow at a rate of 15% until Year 4. After Year 4, the dividends are expected to grow at a constant rate of 5% forever. You decide to employ the CAPM approach to calculate the cost of equity. The company has two different debt issues that are outstanding. The first issue consists of 1,000 semi-annual coupon bonds. Each bond has a face value of $1,000. The annual coupon rate is 10%, and the bonds are…arrow_forward
- Smith Bottling Company (SBC) expects this year's sales to be $624,000. SBC's variable operating costs are 75 percent of sales and its fixed operating costs are $96,000. SBC pays interest on its debt equal to $35,000 per year and its marginal tax rate is 35 percent. SBC has no preferred stock. a. Compute SBC's DOL, DFL, and DTL. Do not round intermediate calculations. Round your answers to two decimal places. DOL: DFL: DTL: b. If sales turn out to be $648,960 rather than $624,000, what will be SBC's EBIT and net income? Do not round intermediate calculations. Round your answers to the nearest dollar. EBIT: $ Net income: $arrow_forwardBob-Bye, Inc. has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The WACC is to be measured by using the following weights:: 40% long term debt, 10% preferred stock, and 50% common stock equity (retained earnings,new common stock or both). The firm’s tax is 30%. Debt: The firm can sell for P980, a 10-year, P1,000 par value bond paying annual interest at 13% coupon rate. A flotation cost of 3% of the par value is required in addition to the discount of P20 per bond. Preferred Stock: 8 percent (annual divided) preferred stock having a par value of P100 can be sold for P65. An additional fee of P2 per share must be paid to the underwriters. Common Stock: The firm’s common stock is currently selling for P50 per share. The dividend expected to be paid at the end of the coming year is P4 per share.. Its dividend payments which have been approximately 60% of earnings per share in each of the past 5…arrow_forwardShoobee, Inc. has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average of capital. The WACC it to be measured by using the following weights: 50% long term, 10% preferred stock, and 40% common stock equity (retained earnings, new common stock issuance, or both). The firm tax is 25%. Debt: The firm can sell for P980, a 10-year, P1,000 par value bond paying annual interest at 13% coupon rate. A flotation cost of 3% of the par value is required in addition to the discount of P20 per bond. Preferred stock: 8 percent (annual dividend) preferred stock having a par value of P100 can be sold for P65. An additional fee of P2.00 per share must be paid to the underwriters. Common stock: The firm’s common stock is currently selling for P50 per share. The recent dividend paid was P4.00 per share. Its dividend payments which have approximately 60% of earnings per share in each past 6 years follows: Year Dividend 2021 P4.00 2020 3.75…arrow_forward
- A company currently has a WACC of 10.6 percent and no debt. The tax rate is 21 percent. a. What is the company’s current cost of equity? b. If the firm converts to 40 percent debt with a cost of 6%, what will its cost of equity be? And the WACC? c. If the firm converts to 60 percent debt with a cost of 6% , what will its cost of equity be? And the WACC? d. What can you conclude from the values of the cost of equity and WACC obtained in b. and c. Please show excel formulasarrow_forwardConsider the following information for Federated Junkyards of America. Debt: $76,000,000 book value outstanding. The debt is trading at 91% of book value. The yield to maturity is 10%. Equity: 2,600,000 shares selling at $43 per share. Assume the expected rate of return on Federated’s stock is 19%. Taxes: Federated’s marginal tax rate is Tc = 0.21. Calculate the weighted-average cost of capital (WACC). (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)arrow_forwardCalculate the after-tax cost of preferred stock for Ohio Valley Power Company, which is planning to sell $100 million of $3.25 cumulative preferred stock to the public at a price of $25 per share. Flotation costs are $1.00 per share. Ohio Valley has a marginal income tax rate of 40%.arrow_forward
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EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
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ISBN:9781337514835
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What is WACC-Weighted average cost of capital; Author: Learn to invest;https://www.youtube.com/watch?v=0inqw9cCJnM;License: Standard YouTube License, CC-BY