1) the target structure for QM industies is 35% common stock 5% prefered stock and 60% debt. if the cost of common equity for the firm is 18.7% the cost of the prefered stock is 9.1 % the before tax cost of debt is 7.8% and the firms tax rate is 35% what is QMs average cost of capital?
2.) crypton electronics has a capital structure consisiting of 41% common stock and 59% debt. a dept issue of $1000 par value 5.8% bonds that mature in 15 years and pay an annual interest will sell for $980 common stock of the firm is currently selling for $29.43 per share and the firm expects to pay $2.21 dividend next year. dividens have grown at a rate of 4.6% oer year and are expected to continue. What is the cost of capital where the tax rate is 30%
3)the target capital stucture for jowers manufacturing is 54% common stock 11% prefered stock and 35% debt. If the common costs of equity for teh firm is 20.8% the cost fo prefered stock is 11.7% and the before tax cost of dept is 10.9% what is Jowers cost f capital. The tax rate is 34%
4)your supervisor has asked you to compute the discount rate for new packaging equipment. you have determined the market value of the firms capital structure as follows; to finance the purchase the firm will sell 10 yr bonds paying 6.9% per year at the market price of $1055 preffered stock paying 2.06 per dividend can be sold for 24.04 common stock is currently selling for $54.32 per share and the firm paid a $3.03 dividenc last year. dividends are expected to continue growing at a rate of %4.6 per year into the indefinite future. if the tax rate is 30% what discount rate should you use to evaluate the equipment purchase.
5)Abe Forrester and three of his friends from college have interested a group of venture capitalists in backing their business idea. The proposed operation would consist of a series of retail outlets to distribute and service a full line of vacuum cleaners and accessories. These stores would be located in Dallas, Houston, and San Antonio. To finance the new venture two plans have been proposed:
• Plan A is an all-common-equity structure in which $2.2 million dollars would be raised be selling 90,000 shares of common stock.
• Plan B would involve issuing $1.3 million dollars in long-term bonds with an effective interest rate of 12.4% plus $.9 million would be raised by selling 45,000 shares of common stock. The debt funds raised under Plan B have no fixed maturity date, in that this amount of financial leverage is considered a permanent part of the firm’s capital structure.
Abe and his partners plan to use a 38% tax rate in their analysis, and they have hired you on a consulting basis to do the following:
a. Find the EBIT indifference level associated with the two financing plans.
b. Prepare a pro forma income statement for the EBIT level solved for in Part a. that shows that EPS will be the same regardless whether Plan A or B is chosen.
6) three recent graduates of the computer science program at the university of Tennessee are forming a company that will write and distribute new application software for the iPhone. Initially the corporation will operate in the southern region of Tennessee, Georgia, north Carolina, and South Carolina. A small group of private investors in the Atlanta, Georgia area is interested in financing the startup company and two financing plans have been put forth for consideration:
The first plan (plan A) is an all-common-equity capital structure. 2.1 million dollars would be raised by selling common stock at $10 per common share
- Plan B would involve the use of financial leverage. 1.1 million dollars would be raised by selling bonds with an effective interest rate of 10.9% (per annum) and the remaining 1 million would be raised by selling common stock at the $10 price per share. The use of financial leverage is considered to be a permanent part of the firms capitalization, so no fixed maturity date is needed for the analysis. A 30% tax rate is deemed appropriate for the analysis.
A. Find the EBIT indifference level associated with the two financial plans. (nearest $)
- B. A detailed financial analysis of the firms prospects suggests that the long term EBIT will be above $339,000 annually. Taking this into consideration, which plan will generate the higher EPS?