Final Answers

Final Answers - Question 1: (Cost of Capital) You are...

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Question 1: (Cost of Capital) You are provided the following information on a company. The total market value is $40 million. The capital structure, shown here, is considered to be optimal. Accounting Value Market Value Bonds, $1000 par, 6% coupon, 6% YTM $10,000,000 $10,000,000 Preferred Stock, 7%, $100 par, 100,000 shares $10,000,000 $8,000,000 Common Stock, $1 par, 100,000 shares $100,000 Capital in excess of pa r $400,000 $22,000,000 * Retained Earnings $13,500,000 * Total market value of common equity a. What is the after-tax cost of debt? (assume the company’s effective tax rate = 40%) . 06*.6 =.036 or 3.6% b. Assuming a $7 dividend paid annually, what is the required return for preferred shareholders (i.e. component cost of preferred stock)? (assume floatation costs = $0.00) 7/80 = .0875 or 8.75% c. Assuming the risk-free rate is 2%, the expected return on the stock market is 9%, and the company's beta is 1.0, what is the required return for common stockholders (i.e., component cost of common stock)? .02 +1 x .07 = .09 or 9% d. What is the company's weighted average cost of capital (WACC)? Bonds 10 million .1869 x .036 = .0067284 P.S 8 million .1495*.0875 = .01308 35.5 million .6636 x .09 = .05972 Total 53.5 million =.0795 or 7.95% WACC
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Question 2: (Capital Budgeting) The Seattle Corporation has been presented with an investment opportunity which will yield end-of-year cash flows of $30,000 per year in Years 1 through 4,
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Final Answers - Question 1: (Cost of Capital) You are...

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