1. (Weighted average cost of capital) The target capital structure…

1. (Weighted average cost of capital) The target capital structure for QM Industries is 43 percent common stock, 7 percent preferred stock, and 50 percent debt. If the cost of equity for the firm is 17.9 percent, the cost of preferred stock is 10.7 percent, the before-tax cost of debt is 8.9 percent, and the firm’s tax rate is 35 percent, what is QM’s weighted average cost of capital?


2. Crypton Electronics has a capital structure consisting of 45% common stock and 55% debt. A debt issue of $ 1,000 par value, 6.4% bonds that mature in 15 years and pay annual interest will sell for $978. Common stock of the firm is currently selling for $29.73 per share and the firm expects to pay a $2.25 dividend next year. Dividends have grown at the rate of 4.8% per year and are expected to do so for the foreseeable future. What is Crypton's cost of capital where the firms tax rate is 30%?

3. The target capital structure for Jowers Manufacturing is 45% common stock, 10% preferred stock, and 45% debt. If the cost of common equity for th firm is 19.4%, the cost of preferred stock is 12.6%, and the beforetax cost of debt is 10.6%, what is Jower's cost of capital? The firm's tax rate is 34%.

Jowers WACC is __%


4. As a member of the Finance department of Ranch Manufacturing, your supervisor has asked you to compute the appropriate discount rate to use when evaluating the purchase of new packaging equipment for the plant. Under the assumption that the firm's present capital structure reflects the appropriate mix of capital sources for the firm, you have determined the market value of the firm's capital structure as follows:
Source of Capital Market Values
Bonds $3,500,000
Preferred stock $1,800,000
Common Stock $6,000,000

To finance the purchase, Ranch manufacturing will see 10 year bonds paying 7.3% per year at the market price of $1035. Preferred stock paying a $2.05 dividend can be sold for $25.06. Common stock for Ranch Manufacturing is currently selling for $55.27 per share and the firm paid a 2.93 dividend last year. Dividends are expected to continue growing at a rate of 4.9% per year into the indefinite future. If the firm?s tax rate is 30% what discount rate should use to evaluate the equipment purchase?

Ranch Manufacturing' s WACC is _______% round three decimal places

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 $2.4 million dollars would be raised
By selling 80,000 shares of common stock.
Plan B would involve issuing $1.1 million dollars in long-term bonds with an effective
Interest rate of 12.2% plus another $1.3 million would be raised by selling 40,000 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 Plan B is chosen.