Reference no: EM132967057
Question - You are an Investment Manager at Pegasus Securities and you are preparing for the next meeting of the investment committee. The committee requested you to assess the capital structure of Industrial Production Ltd a manufacturer of industrial products. The following information is available about the company in assisting you in making your assessment.
A. Cost of Equity
Suppose stock in Industrial Production Ltd has a beta of .80. The return on the market 12% percent, and the risk-free rate is 6 percent the firm's last dividend was $1.20 per share, and the dividend is expected to grow at 8 percent indefinitely. The stock currently sells for $45 per share.
Determine the firm's cost of equity capital using the:
i. SML approach
ii. Dividend growth model
B. Calculating the WACC
In addition to the information given in (a) above, suppose Industrial Production ltd has a target debt-equity ratio of 50 percent. Its cost of debt is 9 percent, before taxes. If the tax rate is 35 percent.
Determine the company weighted average cost of capital (WACC).
C. Flotation Costs
Suppose Industrial Production Ltd is seeking $30 million for a new project. The necessary funds will have to be raised externally. The firm's flotation costs for selling debt and equity are 2 percent and 16 percent, respectively.
i. If flotation costs are considered, what is the true cost of the new project? (4 marks)
ii. If Industrial Production Ltd stock currently sells for $50 per share, and the dividend per share will probably be about $5. A shareholder argues, "It will cost the firm $5 per share to use the stockholders' money this year, so the cost of equity is equal to 10 percent ($5/50)." What is wrong with this conclusion?
|
Improve the efficiency and effectiveness of operations
: How could the data warehouses be used to help the police department to improve the efficiency and effectiveness of its operations?
|
|
What is the shift in the accounting process
: The inventory at hand amounted to 320,000 dollars. What is the shift in the accounting process of the adjustment
|
|
When a manufacturing company increases production
: When a manufacturing company increases its production? the variable cost per unit decreases./ the fixed cost per unit decreases
|
|
Political-economic systems?
: How does the legal system affect the attractiveness of a country as an investment site and/or market?
|
|
Determine the firm cost of equity capital
: The return on the market 12% percent, and the risk-free rate is 6 percent the firm's last dividend was $1.20 per share, Determine firm cost of equity capital
|
|
Translate the company bond interest expense for the year
: BC Inc. has a single wholly-owned American subsidary,If bonds were outstanding throughout the year, translate the company's bond interest expense for the year?
|
|
Interpretation of quantitative distributions
: Prior to beginning work on this discussion forum, read Chapters 3 and 4 of your textbook. (Sharpe, N. D., De Veaux, R. D., & Velleman, P. F. (2019). (4th ed.)
|
|
Compute the annual depreciation that would have been charged
: Using the straight-line method, compute the annual depreciation that would have been charged from 1994 through 2003
|
|
Identify the impact of the personal motivations
: Identify the impact of the personal motivations, attitudes and values on various workplace relationships.
|