Short-term debt only to fund cyclical working capital needs

Assignment Help Financial Management

Reference no: EM131954760

To begin, Bill reviewed Beltway's 2017 balance sheet, which is contained in Table 1. Next, Bill assembled the following relevant data:

(1) The firm's tax rate is 25 percent.

(2) Beltway's 8.0 percent semiannual coupon bonds with 15 years remaining to maturity are not actively traded. However, a block did trade last week at a price of $980 per bond.

(3) Beltway uses short-term debt only to fund cyclical working capital needs.

(4) The firm's pays a $2.50 quarterly dividend ($10.00 per year) on perpetual preferred stock (par value of $100) that is traded on the American Stock Exchange AMEX. Its current price is $102 per share; however, Beltway would incur flotation costs of $1.00 per share on a new issue.

(5) Beltway's common stock is currently selling on the AMEX at $45 per share. The firm's last year’s dividend D0 was $2.00, and dividends are expected to grow at roughly a 8 percent annual rate in the foreseeable future.

(6) The firm's historical beta, as measured by a stock analyst who follows the firm, is 1.3. The current yield on long-term T-bonds is 5.0 percent, and a prominent investment banking firm has recently estimated the market return is 10%.

(7) The required rate of return on an average (A-rated) company's long-term debt is 7.0 percent.

(8) The firm's market value target capital structure is 30 percent debt, 10 percent preferred stock, and 60 percent common stock.

With these data at hand, consider the following questions which Bill must address in his analysis.

Consider Beltway's cost of debt.

a. What is the cost estimate for this component? The answer is 8.23 but I dont understand what values to put into the financial calculator and how to get them

Now consider the firm's cost of preferred stock.

a. What is the preferred cost estimate?

Reference no: EM131954760

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