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A firm is considering a new project that will require external financing. It is attempting to determine the proper discount rate to use in its NPV analysis. Assume the project has the same risk as the overall company as well as the following:
-The firm has 1,000,000 common shares outstanding with a book value of $7 per share and a current market price of $13.25 per share. This years dividend was $0.75 and it is expected to grow at a rate of 4% per year indefinitely.
-The firm also has 150,000 in preferred shares. These shares have a face value of $10 per share (although they are currently trading at $9.40 per share) and pay a fixed dividend of $1.05 per share annually.
-The firm also has debt with a $10,000,000 face and a 8% coupon paid semi-annually. The bonds are currently trading at a price of 106. The bonds have 9 years left to maturity.
-The firm is in the 40% tax bracket.
Given the above information, what discount rate should the firm use (assume its current capital structure is optimal).
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The Bank of Munich has decided to manage its interest rate risk by hedging. Given the bank's decision, which of the following must be TRUE?
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What will be the value of your portfolio in January (net of the proceeds from the options) if the stock price ends up at $30? $40, $50?
A company's 8% coupon rate, semiannual payment, $1,000 par value bond that matures in 30 years sells at a price of $622.23. The company's federal-plus-state tax rate is 30%. What is the firm's after-tax component cost of debt for purposes of calculat..
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