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Find the WACC for a firm with the following characteristics. A few years ago the firm issued $4,000,000 debt with a coupon rate of 4%; currently that debt is trading with a yield to maturity of 5.5% and a value of $3,500,000. The firm has 1,000,000 common shares outstanding at a value of $6/share. You look up the asset beta for firms in the same industry (SIC) code and determine that value is 1.15. The firm plans on keeping its D/E ratio constant (at the current level) going forward and the tax rate is expected to be 35%. The beta of the firm’s debt is estimated as 0.10, the risk free rate is 3% and the market return is 9.8%.
Debt financing is more risky for firms than preferred stock financing because
Briefly explain the differences between common stock and preferred stock? Why would someone buy preferred shares over common shares? Which type shares traditionally pay the highest dividends?
At year-end 2013, Wallace Landscaping’s total assets were $1.6 million and its accounts payable were $415,000. Sales, which in 2013 were $3.0 million, are expected to increase by 25% in 2014. Total assets and accounts payable are proportional to sale..
Which of the following investments yields the highest IRR using a 15% discount rate?
PriceWar Industries recently paid a dividend of D0=$1.32. We expect the company's dividend to grow by 30% this year, by 20% in year 2, and at a constant rate of 5% in year 3 and thereafter. The required return on this low-risk stock is 9.00%. What is..
Why is planning, such as cash flow and revenue planning, so important to businesses? What are the necessary items that businesses must think about when they develop their financial plans and forecasted financial statements?
You would like to have $44,073 for the down payment on a house you plan to buy five years after you graduate. If your investments earn 1.2% APR compounded monthly, how much do you have to invest each month, starting next month, to meet your investmen..
A firm wishes to explore the effect on its cost of capital of the rate at which the company pays taxes. the firms wishes to maintain a capital structure of 25% debt, 15% preferred stock, and 60% common stock. The cost of financing with retained earni..
An investment is expected to generate $1,000,000 each year for 4 years. If the firm's cost of funds is 10%, what is the maximum amount the firm should pay for the investment?
Should preferred stock be classified as debt or equity/Does it matter if the classification is being made by the firm's a. management b. creditors, or c. equity investors?
The Timberlake-Jackson Wardrobe Co. has 11.6 percent coupon bonds on the market with ten years left to maturity. The bonds make annual payments.
A company has Sales- $5000, total assets- $3000, debt to eq ratio=.25, ROE=.15, retained earnings $240 for the year. At what rate can this company grow if it would like to maintain its debt-equity ratio and not issue any new equity for the for see ab..
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