quiz4a.ch12ch13ch14ch15 - University of Houston Bauer...

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University of Houston Bauer College of Business Finance 3332 Principles of Financial Management Quiz 4a: Spring, 2006 Please show all work and clearly indicate your answer. (9 points each) 1. Using the data in the following table, construct a  correctly labeled  marginal cost of capital curve. Show all  calculations. Component Costs of Capital Before tax cost of debt 6% Cost of preferred stock 9% Cost of retained earnings 12% Cost of new equity 14% Capital Structure Debt 25% Preferred stock 15% Common stock 60% Other Info Marginal tax rate 40% Expected retained earnings $8 million 2. Using the data in the table from #1, calculate the firm’s cost of capital for a capital budget of $20 million. 3. Management is planning for a capital budget of $200 million. Retained earnings for the coming year are expected to be  $40 million, and the firm’s marginal tax rate is 40 percent. The firm can net $862.35 on each new bond, $1000 par, five percent coupon paid annually, thirty years to maturity. The firm can issue $6.00 preferred stock to net the firm $75 per share. The firm’s common stock just paid a dividend of $1.00, its market price is $26.50 per share, and investors expect a growth  rate of about six percent per year. Flotation costs on new common stock are $8.83 share.   Calculate and clearly identify the component cost of each source of capital.
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Unleveraged Firm Leveraged Firm Cost of equity k  e 9% 9.63% Debt in capital  structure -- $10,000,000 Pretax cost of debt k  d -- 7% Net operating income (EBIT) $3,000,000 $3,000,000 4. Determine the market value of the Unleveraged firm using the discounted cash flow method, assuming perfect capital  markets with corporate taxes at 40%. 5. Determine the market value of the Leveraged firm using the discounted cash flow method, assuming perfect capital  markets with corporate taxes at 40%. 6. What is the value of the tax shield to the Leveraged firm, assuming perfect capital markets with corporate taxes? Use the following information for questions 7 and 8.
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This note was uploaded on 02/13/2011 for the course FINA 3332 taught by Professor Darlachisholm during the Spring '08 term at University of Houston.

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quiz4a.ch12ch13ch14ch15 - University of Houston Bauer...

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