Ch09 Mini Case - A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16...

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Chapter 9. Mini CaseSituation(1) The firm's tax rate is 40%.(5) Harry Davis's target capital structure is 30% long-term debt, 10% preferred stock, and 60% cTo help you structure the task, Leigh Jones has asked you to answer the following questions.During the last few years, Harry Davis Industries has been too constrained by the high cost of ccapital investments. Recently, though, capital costs have been declining, and the company hasseriously at a major expansion program that has been proposed by the marketing department. an assistant to Leigh Jones, the financial vice president. Your first task is to estimate Harry DaJones has provided you with the following data, which she believes may be relevant to your tas(2) The current price of Harry Davis's 12% coupon, semiannual payment, noncallable bonds wito maturity is $1,153.72. Harry Davis does not use short-term interest-bearing debt on a permanwould be privately placed with no flotation cost. (3) The current price of the firm’s 10%, $100 par value, quarterly dividend, perpetual preferred sDavis would incur flotation costs equal to 5% of the proceeds on a new issue.(4) Harry Davis's common stock is currently selling at $50 per share. Its last dividend (D0) wasare expected to grow at a constant rate of 5.8% in the foreseeable future. Harry Davis's beta is bonds is 5.6%, and the market risk premium is estimated to be 6%. For the own-bond-yield-plupremium approach, the firm uses a 3.2% judgmental risk premium.a. (1.) What sources of capital should be included when you estimate Harry Davis's weighted a(WACC)? 456789101112131415161718192021222324252627282930
Answer: See Chapter 9 PowerPoint file.PowerPoint file.file.b. What is the market interest rate on Harry Davis's debt and what is the component cost of thipurposes?
ABCDEFG123456789101112131415161718192021222324252627282930
Tax rate40%(1 – Tax rate)x60%x10%6.0%A-T rd =(B-T rd)A-T rd =A-T rd =ABCDEFG45464748495051
c. (1.) What is the firm's cost of preferred stock?
T
A-T Risk Premium on Preferred1.92%COST OF PREFERRED STOCK, rps

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