“1.(Weighted average cost of capital) The target capital structure for QM Industries is 35% common stock, 5% preferred stock, and 60% debt. If the cost of common equity for the firm is 17.6%, the cost of preferred stock is 10.3%, the before-tax cost of debt is 7.1%, and the firm’s tax rate is 35%, what is QM’s weighted average cost of capital?
QM’s WACC is ___%. (Round to three decimal places.)
“2. (Weighted average cost of capital) Crypton Electronics has a capital structure consisting of 43% common stock and 57% debt. A debt issue of $1000 par value, 5.9% bonds that mature in 15 years and pay annual interest will sell for $975. Common stock of the firm is currently selling for $29.29 per share and the firm expects to pay a $2.25 dividend next year. Dividends have grown at the rate of 4.9% per year and are expected to continue to do so for the foreseeable future. What is Crypton’s cost of capital where the firm’s tax rate is 30%?
Crypton’s cost of capital is ___% (Round to three decimal places.)”
“3. (Weighted average cost of capital) The target capital structure for lowers Manufacturing is 55% common stock, 19% preferred stock, and 26% debt. If the cost of common equity for the firm is 19.1%, the cost of preferred stock is 11.2%, and the beforetax cost of debt is 10.1%, what is Jowers’ cost of capital? The firm’s tax rate is 34%.
Jowers’ WACC is ___%. (Round to three decimal places.)”
“4. Source of Capital/Market Values
Common Stock $5,700,000
To finance the purchase, Ranch Manufacturing will sell 10-year bonds paying 6.6% per year at the market price of $1028. Preferred Stock paying $1.91 dividend can be sold $24.46. Common Stock for Ranch Manufacturing is currently selling for $54.38 per share. The firm paid a $3.03 dividend last year and expects dividends to continue growing at a rate of 5.4% per year into the indefinite future. If the firm’s tax rate is 30 percent, what discount rate should you use to evaluate the equipment purchase?
Ranch Manufacturing’s WACC is ___%. (Round to three decimal places.)”
“5.(EBIT-EPS analysis) Abe Forrester and three of his friends from college have interested a group of venture capitalists in backing their business idea. The proposed operation would consist of a series of retail outlets to distribute and service a full line of vacuum cleaners and accessories. These stores would be located in Dallas, Houston, and San Antonio. To finance the new venture two plans have been proposed:
• Plan A is an all-common-equity structure in which $2.1 million dollars would be raised be selling 88,000 shares of common stock.
• Plan B would involve issuing $1.3 million dollars in long-term bonds with an effective interest rate of 11.8% plus $0.8 million would be raised by selling 44,000 shares of common stock. The debt funds raised under Plan B have no fixed maturity date, in that this amount of financial leverage is considered a permanent part of the firm’s capital structure.
Abe and his partners plan to use a 35% tax rate in their analysis, and they have hired you on a consulting basis to do the following:
a. Find the EBIT indifference level associated with two financing plans.
b. Prepare a pre forma income statement for the EBIT level solved for in part a. that shows EPS will be the same regardless whether plan a or b is chosen.
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