Can someone please help me figure out these problems... i would really like some
ID: 2698971 • Letter: C
Question
Can someone please help me figure out these problems... i would really like some help figuring out how to do them not just the answers.
1) Stock in Dragula Industries has a beta of 1.1. The market risk premium is 7 percent, and T-bills are currently yielding 5.00 percent. The company%u2019s most recent dividend was $1.40 per share, and dividends are expected to grow at a 7.0 percent annual rate indefinitely.
If the stock sells for $35 per share, what is your best estimate of the company%u2019s cost of equity?
2)
Mullineaux Corporation has a target capital structure of 45 percent common stock, 15 percent preferred stock, and 40 percent debt. Its cost of equity is 14 percent, the cost of preferred stock is 5 percent, and the pretax cost of debt is 7 percent. The relevant tax rate is 40 percent.
What is Mullineaux%u2019s WACC? 8.73
What is the aftertax cost of debt?
3)Erna Corp. has 8 million shares of common stock outstanding. The current share price is $87, and the book value per share is $6. Erna Corp. also has two bond issues outstanding. The first bond issue has a face value of $75 million, has a coupon of 10 percent, and sells for 97 percent of par. The second issue has a face value of $50 million, has a coupon of 11 percent, and sells for 105 percent of par. The first issue matures in 25 years, the second in 7 years.
a. What are Erna%u2019s capital structure weights on a book value basis?
Equity/value_____
Debt/Value______
b. What are Erna%u2019s capital structure weights on a market value basis?
Equity/value_____
Debt/Value_____
4)
You are given the following information for Lightning Power Co. Assume the company%u2019s tax rate is 38 percent.
9,000 7.6 percent coupon bonds outstanding, $1,000 par value, 30 years to maturity, selling for 105 percent of par; the bonds make semiannual payments.
26,000 shares of 4 percent preferred stock outstanding, currently selling for $86 per share.
What is the company's WACC?
1) Stock in Dragula Industries has a beta of 1.1. The market risk premium is 7 percent, and T-bills are currently yielding 5.00 percent. The company%u2019s most recent dividend was $1.40 per share, and dividends are expected to grow at a 7.0 percent annual rate indefinitely.
Explanation / Answer
1) Stock in Dragula Industries has a beta of 1.1. The market risk premium is 7 percent, and T-bills are currently yielding 5.00 percent. The company%u2019s most recent dividend was $1.40 per share, and dividends are expected to grow at a 7.0 percent annual rate indefinitely.
If the stock sells for $35 per share, what is your best estimate of the company%u2019s cost of equity?
Required Rate of Return as per CAPM= 5+7*1.1 =12.7
Required rate of Return as per DDM approach =
Share Price = D1/Ke-g
35 = 1.4*1.07/Ke-0.07
Ke = 1.498/35 + 0.07 = 11.28%
The DDM is more realistic
Therefore, Company%u2019s Cost of equity = 11.28%
2)
Mullineaux Corporation has a target capital structure of 45 percent common stock, 15 percent preferred stock, and 40 percent debt. Its cost of equity is 14 percent, the cost of preferred stock is 5 percent, and the pretax cost of debt is 7 percent. The relevant tax rate is 40 percent.
a.
What is Mullineaux%u2019s WACC?
WACC = 14*0.45 + 15*0.05+ 4.20*0.40 = 8.73%
b.
What is the aftertax cost of debt?
Aftertax cost of debt= 7(1-0.40) = 4.20%
3)Erna Corp. has 8 million shares of common stock outstanding. The current share price is $87, and the book value per share is $6. Erna Corp. also has two bond issues outstanding. The first bond issue has a face value of $75 million, has a coupon of 10 percent, and sells for 97 percent of par. The second issue has a face value of $50 million, has a coupon of 11 percent, and sells for 105 percent of par. The first issue matures in 25 years, the second in 7 years.
a. What are Erna%u2019s capital structure weights on a book value basis?
Equity/value = 6*8Million/(6*8million + 75million + 50million) = 48/173 = 27.75%
Debt/Value = 125/173= 72.25%
b. What are Erna%u2019s capital structure weights on a market value basis?
Equity/value = 87*8Million/(87*8million + 75million*97% + 50million*105%) = 696/821.25 =84.75%
Debt/Value = 125.25/821.25 = 15.25%
4)
You are given the following information for Lightning Power Co. Assume the company%u2019s tax rate is 38 percent.
Debt:
9,000 7.6 percent coupon bonds outstanding, $1,000 par value, 30 years to maturity, selling for 105 percent of par; the bonds make semiannual payments.
Common stock:
480,000 shares outstanding, selling for $66 per share; the beta is 1.09.
Preferred stock:
26,000 shares of 4 percent preferred stock outstanding, currently selling for $86 per share.
Market:
9 percent market risk premium and 5.60 percent risk-free rate.
What is the company's WACC?
Re = 5.60+9*1.09 = 15.41%
After tax cost of debt = 7.6*0.62 =4.712%
Weight of equity =480000*66 / (480000*66+ 9000*1000*105% + 26000*86) = 31680000/43366000 = 73.05%
Weight of debt = 9450000/43366000 = 21.79%
Weight of preferred stock = 2236000/43366000 = 5.16%
WACC = 15.41*73.05% + 4.712*21.79% + 4*5.16% = 12.49%
1) Stock in Dragula Industries has a beta of 1.1. The market risk premium is 7 percent, and T-bills are currently yielding 5.00 percent. The company%u2019s most recent dividend was $1.40 per share, and dividends are expected to grow at a 7.0 percent annual rate indefinitely.