FIN 370 Week 4 LAB (Promotion work)
1 (Define captital structure weights)Templeton extended care facilities, inc., is considering the acquisition of a chain of cemeteries for $400 million. Since the primary asset of this business is real estate, Templetons management has determined that they will be able to borrow the majority of the money needed to buy a business. The current owners have no debt financing but Templeton plans to borrow $300 million and invest only $ 100 million in equity in the acquisition. What weights should templeton use in computing the WACC for this acquisition?
a) the appropriate wd weight is _% (round to one decimal)
b) the appropriate wcs weight is_%
2 (Individual or compound cost of capital) Compute the cost of capital for the firm for the following:
a.A bond that has $1,000 par value (face value) and a coupon onterest rate of 11.2 %. Interest payment are $56.00 and are paid semiannually. The bonds have acurrent market value of $1.122 and will maturs in 10 years. The firm's marginal tax rate is 34%
b. A new common stock issue that paid $1.77 last year. The firms dividends are expected to continue to grow at 7.6 % per year forever. The price of the firms common stock is now $27.33
c. A perferred stock that sells for $132, pays a dividend of 8.2%, and has a $100 par value.
d. A bond selling to yield 12.7% where the firms tax rate is 34%
3(Cost of Preferred Stock) The preferred stock of Gator Industries sells for $34.36 and pays $2.75 per year in dividends. What is the cost of preferred stock financing? If Gator were to issue 504,000 more preferred shares just like the ones it couurently has outstanding, it could sell them for $34.36 a share but would incur flotation costs of $2.85 per share. what are the flotation costs for issuing the preferred shares and how should this cost be incorporated into the NPV of the project being financed?
4 (Cost of Debt) The Walgren Corporation is contemplating a new investment to be finance using one-third from debt. The firm could sell new $1,000 par value bonds with a 15-year maturity at a price of $945 that carry a coupon interest rate is 12.2 % that is paid semiannually, and the bonds would mature in fifteen years. If the company is in a 34% tax bracket, what is the after-tax cost of capital to Walgren for bonds?
5 (Cost of Debt) Gillian Stationery Corporation needs to raise $600,000 to improve its manufacturing plant. It has decided to issue a $1,000 par value bond with a 8% annual coupon rate and a 10-year maturity. If the investors require a 10% rate of return:
Compute the market value of the bonds.What will the net price be if flotation costs are 11.5% of the market price?How many bonds will the firm have to issue to receive the needed funds?What is the firm’s after-tax cost of debt if its average tax rate is 25% and its marginal tax rate is 34%?
6 (Weighted average cost of capital) As a consultant to GBH Skiwear, you have been
asked to compute the appropriate discount rate to use in the evaluation of the purchase of a
new warehouse facility. You have determined the market value of the firm’s current capital
structure (which the firm considers to be its target mix of financing sources) as follows:
Source of Capital Market Value
Preferred stock $120,000
Common stock $420,000
To finance the purchase, GBH will sell 20-year bonds with a $1,000 par value paying
7.6% per year at the market price of $952. Preferred stock paying a $2.53 dividend can be
sold for $35.21. Common stock for GBH is currently selling for $50.25 per share. The firm
paid a $3.91 dividend last year and expects dividends to continue growing at a rate of
4.2% per year into the indefinite future. The firm’s marginal tax rate is 34%. What
discount rate should you use to evaluate the warehouse project?
7 (Describing a firm’s capital structure)Lowe's Companies, Inc.(LOW) and its susidiaries operate as a home improvement retailer in the United states and canda. As of february 1,2008 it operated 1,534 stores in 50 states and canada.The company's balance sheet for february 1,2008, included the following sources of financing
From data table
account payable 4137000
short term/current debt 1104000
other current liablities 2510000
total current liablities 7751000
long term debt 5576000
other long term debt 670000
long term liablities 6246000
stockholders equity 16098000
a. calculate the value's of Lowe's debt ratio and interest- bearing debt ratio
b. If the market value of Lowe's common equity is$ 35.86 billion and Lowe's has no excess cash, what is the firm's debt to enterprise value ratio?(Hint: you may assume that the market value of the firm's interest- bearing debt equals its book value)
8(computing interest tax savings)Dharma supply has earnings before and taxes (EBIT) of $ 598,000, interest expenses of $ 298,000, and faces a corporate tax rate of 36%.
a. what is Dharma supply's net income?
b.what would Dharma's net income be if it didn't have any debt(and consequently no interest expense)?
c. what are the firm's interest tax savings?
9 (Leverage and EPs)you have developed the following pro forma income statement for your corporation:
variable cost: 22780000
revenue before fixed cost: 22911000
Fixed cost: 9278000
Interest Expenses: 1366000
earning before taxes: 12267000
taxes 50% : 6133500 taxes: 50%
Net income: 6133500
It represents the most recent year's operations, which ended yesterday. your supervisor in the controller's office has just handed you a memorandum asking for written resposes to the following questions:
a.if sales should increase by 30%, by what percent would earnings before interest and taxes and net income increase?
b. if sales should decrease by 30%, by what percent would earnings before interest and taxes and net income decrease?
c. If the firm were to reduce its reliance on debt financing such that interest expense were cut in half, how would this affect your answer to parts a and b?
10 (EBIT-EPS analysis) 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, Huston, and San Antonio. To finance the new venture two plans have been proposed:
.Plan A is an all-common-equity structure in which $2.3 million dollars would be raised by selling 80,000 shares of common stock.
.Plan B would involve issuing $2.3 million dollars in long-term bonds with an effective interest rate of 11.8% plus $0.9 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 34% tax rate with 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. (Round to the nearest dollar.) (B) Prepare a pro forma income statement for the EBIT level solved for in part a. that shows that the EPS will be the same regardless whether Plan A or Plan B is chosen. (Round income statement amounts to the nearest dollar except the EPS to the nearest cent.)
11 (EBIT-IPS break-even analysis) Home Depot, Inc. (HD] had 1.70 billion shares of common stock outstanding ir 2008, whereas Lowes Companies, Inc, (LOW) had 1.46 billion shares outstanding. Assuming
Home Depots 2008 interest expense is $696 million, Lowes' interest expense is $239 million, and a 38 percent tax rate for both firms, what is their break-even level of operating income (i.e., the level of EBIT where EPS is the same for both firms)?