Finance final, • Company X has $100,000 face value of outstanding bonds consisting of 100, Finance Basics

Finance final, Finance Basics

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• Company X has $100,000 face value of outstanding bonds consisting of 100 $1,000 face value bonds with a 4% annual coupon and 20 years remaining until maturity. The bonds are currently selling a price of $900 (90% of face value). A new 20 year issue could be sold for a flotation cost of 5% of face value. The company is in the 40% tax bracket (this applies to all of the questions on this page)
• Calculate the investor’s required rate of return on the bonds today
• If the investor’s required rate of return on the bond was 3%, what would be the current price of the bond
• What is the total current market value of all of the outstanding bonds?
• What annual coupon would have to be placed on the new issue in order for it to sell at par?
• Calculate the flotation cost and tax savings from the proposed new bond issue
• Calculate the cost of the new bond financing
• Company X has $25,000 of outstanding preferred stock, consisting of 250 shares, each with $100 face value and currently selling for $90 a share. The preferred stock pays an annual dividend of $4 per share. A new preferred stock issue could be sold for a flotation cost of 7% of face value.
• Calculate the investor’s required rate of return on the preferred stock today
• What annual dividend rate would have to be placed on the new issue for it to sell at par?
• Calculate the cost of the new preferred stock financing
• What is the total market value of all of the outstanding preferred stock?

• Company X has 10,000 shares of common stock outstanding that is currently selling for $60.00 a share. The company recently paid an annual dividend of $2.00 per share, and the dividend is expected to grow by 5% a year. An investment bank has advised that a new issue could be sold for a flotation cost of 8% of face value
• Calculate the dividend anticipated in the next year
• Calculate the investor’s required rate of return from the company’s common stock
• Calculate the company’s cost of a new stock issue
• Calculate the investor’s required rate of return if Company X had a Beta of 1.2, the risk-free rate is 4% and the market risk premium is 5%,
• Calculate the price of the Company’s common stock based on your answers in a) and d)
• What is the total market value of all of the outstanding common stock?

• Company X has announced that its target capital structure will consist of 30% bond financing, 10% preferred stock financing, and 60% common equity financing.
• Calculate Company X’s weighted average cost of capital (WACC) based on the target capital structure
• Calculate Company X’s weighted average cost of capital (WACC) based on company’s X market values for bonds, preferred stock, and common stock

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Finance final, Finance Basics

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