Reference no: EM131539497

During the last few years, Jana Industruies has been too constrained by the high cost of capital to make many capital investments. Recently, though, capital costs have been declining and the company has decided to look seriously at a major expansion program proposed by the marketing department. Assume that you are an assistant to Jones, the financial vice president. Your fist task is to estimate Jana's cost of capital. Jones has provided you with the following data which may be relevant to your task: A. The firm's tax rate is 40%. B. The current price of Jana's 12% coupon, semiannual payment, noncallable bonds with 15 years remaining to maturity is $1,153,172. Jana does not use short-term interest-bearing debt on a permanent basis. New bonds would be privately placed no flotation cost. C.The current price of the firm's 10%, $100 par value, quarterly dividend, perpetual preferred stock is $116.95. Jana would incur flotation costs equal to 5% of the proceeds on the new issue. D. Jana's common stock is currently selling at $50 per share. Its last dividend was $3.12 and dividends are expected to grow at constant rate of 5.8% in forseeable future. Jana's beta is 1.2, the yield on T-bonds is 5.6% and the market risk premium is estimated to be 6%. For the own-bond-yield plus judgemental-risk-premium approach, the firm uses a 3.2% risk premium. E. Jana's target capital structure is 30% long-term debt, 10% preferred stock, and 60% common equity. ANSWER: A1) What sources of capital should be included when you estimate Jana's weighted average cost of capital? A2) Should the component costs be figured on a before-tax or after-tax basis? A3) Should the costs be historical costs or marginal costs? B) What is the market interest rate on Jana's debt, and what is the component cost of this debt for WACC purposes? C1) What is the firm's cost of preferred stock C2) Jana's preferred stock is riskier to investors than its debt, yet the preferred stock's yield to investors is lower than the yield to maturity on the debt. Does this suggest you made a mistake? Consider taxes. D1) What are the two primary ways companies raise common equity? D2) Why is there a cost associated with reinvested earnings? D3) Jana doesn't plan to issue new shares of common stock. Using CAPM approach, what is Jana's estimated cost of equity?