Reference no: EM13509867
Dillon Labs has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The weighted average cost is to be measured by using the following weights: 40% long-term debt, 10% preferred stock, and 50% common stock equity (retained earnings, new common stock, or both). The firm's tax rate is 40%.
Debt The firm can sell for $980 a 10-year, $1,000-par-value bond paying annual interest at a 10% coupon rate. A flotation cost of 3% of the par value is required in addition to the discount of $20 per bond.
Preferred stock Eight percent (annual dividend) preferred stock having a par value of $100 can be sold for $65. An additional fee of $2 per share must be paid to the underwriters.
Common stock The firm's common stock is currently selling for $50 per share. The dividend expected to be paid at the end of the coming year (2013) is $4. Its dividend payments, which have been approximately 60% of earnings per share in each of the past 5 years, were as shown in the following table.
Year Dividend
2015 $3.75
2014 3.50
2013 3.30
2012 3.15
2011 2.85
It is expected that to attract buyers, new common stock must be underpriced $5 per share, and the firm must also pay $3 per share in flotation costs. Dividend payments are expected to continue at 60% of earnings. (Assume that Rr=Rs.)
a. Calculate the after-tax cost of debt.
b. Calculate the cost of preferred stock.
c. Calculate the cost of common stock.
d. Calculate the WACC for Dillon Labs
P9-5 The cost of debt Gronseth Drywall Systems, Inc., is in discussions with its investment bankers regarding the issuance of new bonds. The investment banker has informed the firm that different maturities will carry different coupon rates and sell at different prices. The firm must choose among several alternatives. In each case, the bonds will have a $1,000 par value and flotation costs will be $30 per bond. The company is taxed at a rate of 40%. Calculate the after-tax cost of financing with each of the following alternatives.
P8-27
Portfolio return and beta Jamie Peters invested $100,000 to set up the following
portfolio 1 year ago.
Asset Cost Beta at purchase Yearly income Value today
A $20,000 0.80 $1,600 $20,000
B 35,000 0.95 1,400 36,000
C 30,000 1.50 - 34,500
D 15,000 1.25 375 16,500
a. Calculate the portfolio beta on the basis of the original cost figures.
b. Calculate the percentage return of each asset in the portfolio for the year.
c. Calculate the percentage return of the portfolio on the basis of original cost,
using income and gains during the year.
d. At the time Jamie made his investments, investors were estimating that the market
return for the coming year would be 10%. The estimate of the risk-free rate of return
averaged 4% for the coming year. Calculate an expected rate of return for each stock
on the basis of its beta and the expectations of market and risk-free returns.
e. On the basis of the actual results, explain how each stock in the portfolio performed
relative to those CAPM-generated expectations of performance. What
factors could explain these differences?
|
Calculate total-average total-variable and margin costs
: Calculate the marginal and average variable product of each unit of labor input and calculate total, average total, average variable, and marginal costs.
|
|
Estimate how much time does it take for bike to come to rest
: A person is riding a bicycle, and its wheels have an angular velocity of 10.6 rad/s. How much time does it take for the bike to come to rest
|
|
Cost of equity
: Cost of Equity
|
|
Explain why starting a large number of wafers in production
: Explain why starting a large number of wafers into production will boost profit even though the chips that ultimately result from the wafers are ones that have not been sold or even completed. Is the company's approach to boosting profit ethical?
|
|
Measure the cost of each specific type
: Dillon Labs has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The weighted average cost is to be measured by using the following weights: 40% long-term debt, 1..
|
|
What is the quantity demanded at each price
: What is the quantity demanded at each price and calculating the coefficient of elasticity, is demand over this range elastic or inelastic? How do you know?
|
|
What is the relative velocity of the system
: During a baseball game, a batter approaches the plate. The pitcher hurtles the ball in the direction of the batter at a speed of 85 miles per hour. What is the relative velocity of the system immediately after the collision
|
|
What was the companys revenue for the year
: During the year, Marilu received additional owner investments of $21,000, recorded expenses of $60,000, and had owner drawings of $4,000. If Marilu's ending owner's equity was $46,000, what was the company's revenue for the year?
|
|
Graph the demand and supply functions for sweatshirts
: Graph the demand and supply functions for sweatshirts and find the equilibrium price and quantity - what effect will an increase in the price of gym shoes (a complement) have on the equilibrium price and quantity of sweatshirts, all else constant?
|