Rd = 13%, Tax rate = 0% rd(1-T)=13%(1-0)=13.00%. b. Rd = 13%, Tax rate = 20% rd(1-T) = 13%(0.80) ... more Rd = 13%, Tax rate = 0% rd(1-T)=13%(1-0)=13.00%. b. Rd = 13%, Tax rate = 20% rd(1-T) = 13%(0.80) = 10.40%. c. Rd = 13%, Tax rate = 35% rd(1-T) = 13%(0.65) = 8.45%. 11-2 LL incorporated's currently outstanding 11% coupon bonds have a yield to maturity of 8%. LL believes it could issue new bonds at par that would provide a similar yield to maturity. If its marginal tax rate is 35%, what is LL's after-tax cost of debt? After-Tax Cost of Debt rd(1-T) = 0.08(0.65) = 5.2%. 11-3 Duggins Veterinary Supplies can issue perpetual preferred stock at a price of $50 a share with an annual dividend of $4.50 a share. Ignoring floatation costs, what is the company's cost of preferred stock, rps? Cost of Preferred Stock Vps =$50 Dps =$4.50 F=0% rps = rps = Dps / Vps(1−F) = $4.50 / $50(1−0.0) = 9%. 11-4 Burnwood Tech plans to issue some $60 par preferred stock with a 6% dividend. A similar stock is selling on the market for $70. Burnwood must pay floatation costs of 5% of the issue price. What is the cost of the preferred stock? Cost of Preferred Stock with Floatation Costs rps = $60(0.06) / $70.00(1-0.05) = $3.60 / $66.50 = 5.41% 11-5 Summerdahl Resotr's common stock is currently trading at $36 a share. The stock is expected to pay a dividend of $3.00 a share at the end of the year (D1 = $3.00), and the dividend is expected to grow at a constant rate of 5% a year. Using the DCF method. Cost of Equity: DCF P0 =$36 D1 =$3.00 g=5% rs =? rs = D1 / P0 + g = ($3.00/$36.00) + 0.05 = 13.33%. 11-6 Booher Book Stores has a beta of 0.8. The yield on a 3-month T-Bill is 4%, and the yield on a 10-year T-bond is 6%. The market risk premium is 5.5% and the return on an average stock in the market last year was 15%. What is the estimated cost of common equity using the CAPM? Cost of Equity: CAPM rs = rRF + bi(RPM) = 0.06 + 0.8(0.055) = 10.4%.
The Besnier Company had $250 million of sales last year, and it had $75 million of fixed assets t... more The Besnier Company had $250 million of sales last year, and it had $75 million of fixed assets that were being operated at 80% of capacity. In millions, how large could sales have been if the company had operated at full capacity? RATIONALE: Sales $250 Fixed assets $75.0 % of capacity utilized 80.0% Full capacity sales = Actual sales/% of capacity used = 250/.80 = = $312.5 —————————————————————————————————————————— Last year Baron Enterprises had $350 million of sales, and it had $270 million of fixed assets that were used at 65% of capacity. In millions, by how much could Baron's sales increase before it is required to increase its fixed assets? RATIONALE: Sales $350 Fixed assets (not used in calculations) $270 % of capacity utilized 65% Sales at full capacity = Actual sales/% of capacity used = 350/.65 = $538.46 Additional sales without adding FA = Full capacity sales − Actual sales = 538.46-350 = = $188.46 —————————————————————————————————————————— North Construction had $850 million of sales last year, and it had $425 million of fixed assets that were used at only 60% of capacity. What is the maximum sales growth rate North could achieve before it had to increase its fixed assets? RATIONALE: Sales $850 Fixed assets (not used in calculations) $425 % of capacity utilized 60% Sales at full capacity = Actual sales/% of capacity used = 850/.60 = = $1,416.67 Additional sales without adding FA = Full capacity sales − Actual sales = = $566.67 Percent growth in sales = Additional sales/Old sales = 566.67/850 = 66.67% ——————————————————————————————————————————
Rd = 13%, Tax rate = 0% rd(1-T)=13%(1-0)=13.00%. b. Rd = 13%, Tax rate = 20% rd(1-T) = 13%(0.80) ... more Rd = 13%, Tax rate = 0% rd(1-T)=13%(1-0)=13.00%. b. Rd = 13%, Tax rate = 20% rd(1-T) = 13%(0.80) = 10.40%. c. Rd = 13%, Tax rate = 35% rd(1-T) = 13%(0.65) = 8.45%. 11-2 LL incorporated's currently outstanding 11% coupon bonds have a yield to maturity of 8%. LL believes it could issue new bonds at par that would provide a similar yield to maturity. If its marginal tax rate is 35%, what is LL's after-tax cost of debt? After-Tax Cost of Debt rd(1-T) = 0.08(0.65) = 5.2%. 11-3 Duggins Veterinary Supplies can issue perpetual preferred stock at a price of $50 a share with an annual dividend of $4.50 a share. Ignoring floatation costs, what is the company's cost of preferred stock, rps? Cost of Preferred Stock Vps =$50 Dps =$4.50 F=0% rps = rps = Dps / Vps(1−F) = $4.50 / $50(1−0.0) = 9%. 11-4 Burnwood Tech plans to issue some $60 par preferred stock with a 6% dividend. A similar stock is selling on the market for $70. Burnwood must pay floatation costs of 5% of the issue price. What is the cost of the preferred stock? Cost of Preferred Stock with Floatation Costs rps = $60(0.06) / $70.00(1-0.05) = $3.60 / $66.50 = 5.41% 11-5 Summerdahl Resotr's common stock is currently trading at $36 a share. The stock is expected to pay a dividend of $3.00 a share at the end of the year (D1 = $3.00), and the dividend is expected to grow at a constant rate of 5% a year. Using the DCF method. Cost of Equity: DCF P0 =$36 D1 =$3.00 g=5% rs =? rs = D1 / P0 + g = ($3.00/$36.00) + 0.05 = 13.33%. 11-6 Booher Book Stores has a beta of 0.8. The yield on a 3-month T-Bill is 4%, and the yield on a 10-year T-bond is 6%. The market risk premium is 5.5% and the return on an average stock in the market last year was 15%. What is the estimated cost of common equity using the CAPM? Cost of Equity: CAPM rs = rRF + bi(RPM) = 0.06 + 0.8(0.055) = 10.4%.
The Besnier Company had $250 million of sales last year, and it had $75 million of fixed assets t... more The Besnier Company had $250 million of sales last year, and it had $75 million of fixed assets that were being operated at 80% of capacity. In millions, how large could sales have been if the company had operated at full capacity? RATIONALE: Sales $250 Fixed assets $75.0 % of capacity utilized 80.0% Full capacity sales = Actual sales/% of capacity used = 250/.80 = = $312.5 —————————————————————————————————————————— Last year Baron Enterprises had $350 million of sales, and it had $270 million of fixed assets that were used at 65% of capacity. In millions, by how much could Baron's sales increase before it is required to increase its fixed assets? RATIONALE: Sales $350 Fixed assets (not used in calculations) $270 % of capacity utilized 65% Sales at full capacity = Actual sales/% of capacity used = 350/.65 = $538.46 Additional sales without adding FA = Full capacity sales − Actual sales = 538.46-350 = = $188.46 —————————————————————————————————————————— North Construction had $850 million of sales last year, and it had $425 million of fixed assets that were used at only 60% of capacity. What is the maximum sales growth rate North could achieve before it had to increase its fixed assets? RATIONALE: Sales $850 Fixed assets (not used in calculations) $425 % of capacity utilized 60% Sales at full capacity = Actual sales/% of capacity used = 850/.60 = = $1,416.67 Additional sales without adding FA = Full capacity sales − Actual sales = = $566.67 Percent growth in sales = Additional sales/Old sales = 566.67/850 = 66.67% ——————————————————————————————————————————
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