1. The Accidental Petroleum Company is trying to determine its weighted
average cost of capital for use in making a number of investment decisions. The firm's bonds were issued 6 years ago and have 14 years left until maturity. They carried an 8% coupon rate, and are currently selling for P962.50.
The firm's preferred stock carries a P4.60 dividend and is currently selling at P42.50 per share. Accidental's investment banker has stated that issue costs for new preferred will be 50 cents per share.
The firm has significant retained earnings, but will also need to sell new common stock to finance the projects it is now considering. Accidental Petroleum common stock is expected to pay a P2.50 per share dividend next year, and is expected to maintain an 8% growth rate for the foreseeable future. The stock is currently priced at P50 per share, but new common stock will have flotation costs of 60 cents per share.
Calculate the costs of the various components of Accidental Petroleum's capital (Kd, Kp, Ke, Ks). The firm's tax rate is 34%.
2. The JBU Company's currently outstanding 10% coupon bonds have a yield to maturity of 12%. JBU believes it could issue at par new bonds that would provide a similar yield to maturity. If its marginal tax rate is 35%, what is JBU's after-tax cost of debt?
3. KSP Industries plans to issue some P100 par preferred stock with an 11% dividend. The stock is selling in the market for P97 but KSP must pay flotation costs of 5% from the market price. What is KSP's cost of preferred stock with flotation considered?
4. The Complex Company's next expected dividend is P3.18; its growth rate is 6% and the stock now sells for P36. New stock (external equity) can be sold to net the firm P32.40 per share.
A. What is Complex' cost of retained earnings?
B. What is Complex' percentage flotation cost?
C. What is Complex' cost of new common stock?
5. Centrio Corporation has a capital structure that consists solely of debt and common equity. The company can issue debt at 11%. Its stock currently pays a P2 dividend per share and the stock's price is currently P24.75. The company's dividend is expected to grow at a constant rate of 7% per year. Its tax rate is 35%. The company estimates that its weighted average cost of capital (WACC) is 13.95%. What percentage of the company's capital structure consists of debt financing?
6. Entertainment Corporation is considering a project for the coming year that will require an investment cost of P100 Mln. The company plans to finance the project by a combination of debt and equity, as follows:
· Issue P20 Mln of 10-year bonds at a price of 102, with an interest rate of 10% and flotation cost of 3% of par.
· Use P80 Mln of funds generated from earnings retained in the business.
The expected market rate of return is 14%. The current rate of treasury bills is 8%. The beta coefficient for Entertainment Corporation is 1.2. The corporate income tax rate is 32%.
A. What is the effective rate of interest of the bonds?
B. What is the after-tax effective cost of bonds?
C. Using the Capital Asset Pricing Model (CAPM), what is the cost of equity capital for Entertainment Corporation?
D. Assume that the after-tax cost of debt is 7% and the cost of equity capital is 15%, what is the weighted average cost of capital (WACC) for Entertainment Corporation's project?