I just need to know how to calculate the yield rate and the annual yield. I also
ID: 2622680 • Letter: I
Question
I just need to know how to calculate the yield rate and the annual yield. I also need to know where the values are taken from. Thank you for your help in advance.
MGT 325 Module 5 Spreadsheet Exam - this is one long problem or case To do this exam you need to study the cases at the end of Chapter 11. Remember that the cost of debt when calculated is before tax and has to be converted to an after tax return. The returns on preferred and common stock are already after tax so are not adjusted which is in Chapter 10. PROBLEM FOR CHAPTERS TEN AND ELEVEN
Saint Leo Manufacturing is going to introduce a new product line and to accomplish this it has four projects analyzed in which it wants to invest a total of $100 million. Your job is to find what it will cost to raise this amount of capital and based on the cost of capital determine which of the projects should be accepted by the firm to invest in.
PROJECTS A B C D INVESTMENT $30,000,000 $20,000,000 $25,000,000 $25,000,000
EXPECTED RETURN 10.00% 14.00% 11.50% 16.00%
The firms capital structure consists of:
FMV CAPITAL PERCENTAGE AMOUNT
DEBT 30% $15,000,000
PREFERRED STOCK 10% $5,000,000
COMMON STOCK 60% $30,000,000
$50,000,000
Other information about the firm:
CORPORATE TAX RATE 30%
DEBT CURRENT PRICE $1,050.00
ANNUAL INTEREST 6.00% CURRENT INTEREST PAID SEMIANNUALLY ORIGINAL MATURITY 25 YEARS, BUT NOW 20 YEARS LEFT
MATURITY VALUE $1,000.00
FLOTATION COST INSIGNIFICANT
MARKET YIELD PROJECTED:
UP TO $20 MILLION 9%
ABOVE $20 MILLION 12% 3 % additional premium
PREFERRED
CURRENT PRICE $45.00
LAST DIVIDEND (D0) $3.38 FIXED AT 7.5% OF PAR
FLOTATION COST $1.50
NEXT DIVIDEND (D1) $3.38
COMMON
CURRENT PRICE $35.00
LAST DIVIDEND (D0) $1.00
RETAINED EARNINGS $10,000,000
GROWTH RATE (g) 9%
FLOTATION COST $1.50
NEXT DIVIDEND (D1) $1.090
NOTE - Once retained earnings is maxed out new common stock will need to be issued. Any preferred stock would be new preferred stock. You may want to review case in chapter 11.
REQUIRED: In all of the required parts one part builds on the previous part. If you can't do a part use the set of other numbers to solve the next part.
a. What is the current Kd, Kp and Ke assuming no new debt or stock?
b. Since any new capital investment will require issuing new perferred stock, what would the the new returns be preferred stock (knp) and the new cost of capital?
c. What amount of increase (marginal cost of capital) in capital structure will the firm run out of retained earnings and be forced to issue new common stock?
d. If new common stock has to be issued what will the new return required be (Kne) and the new cost of capital?
Note: All Answers Should Be Taken Out to 2 Decimal Places, Especially the Interest Rate Answers.
Part a
Current price $1,050.00
Maturity value $1,000.00
Interest payment $30
Payment periods 40
Yield rate six month rate
Annual yield annual rate
Kd
Kp
Ke
Current Cost of capital
Explanation / Answer
For Kd calculation, you can input the cash flow (-1050 as initial sum, 30 for first 39 payments and 1030 as last payment)
Then calculate IRR fo this Cash flow = IRR(1050:30...:30:1030, 3%) = 2.791%
As this perecentage is half year return, calculate yearly yeild as (1+2.791%)^2 -1 = 5.660%
For equity using gordon growth method;
P = D1*(1+G)/(r-g)
35 = 1.09*(1+9%)/(r-9%)
r- 9% = 3.395% r = 12.395% (ke)
For preferred (kp), g = 0
45 = 3.38/r
r = 13.609% (kp)