P9–17 Calculation of individual costs and WACC Dillon Labs has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The weighted average cost is to be measured by using the following weights: 40% long-term debt, 10% preferred stock, and 50% common stock equity (retained earnings, new common stock, or both). The firm’s tax rate is 40%. Debt The firm can sell for $980 a 10-year, $1,000-par-value bond paying annual
interest at a 10% coupon rate. A flotation cost of 3% of the par value is required
in addition to the discount of $20 per bond.
Preferred stock Eight percent (annual dividend) preferred stock having a par
value of $100 can be sold for $65. An additional fee of $2 per share must be paid
to the underwriters.
Common stock The firm’s common stock is currently selling for $50 per share.
The dividend expected to be paid at the end of the coming year (2016) is $4. Its
dividend payments, which have been approximately 60% of earnings per share in
each of the past 5 years, were as shown in the following table.
Year Dividend
2015 $3.75
2014 3.50
2013 3.30
2012 3.15
2011 2.85

It is expected that to attract buyers, new common stock must be underpriced $5 per share, and the firm must also pay $3 per share in flotation costs. Dividend payments are expected to continue at 60% of earnings. (Assume that rr = rs.)
a. Calculate the after-tax cost of debt.
b. Calculate the cost of preferred stock.
c. Calculate the cost of common stock.
d. Calculate the WACC for Dillon Labs.

Suppose that you have $1 million and the following two opportunities from which to construct a portfolio:

1. Risk-free asset earning 10% per year.

2. Risky asset with expected return of 25% per year and standard deviation of 33%.

If you construct a portfolio with a standard deviation of 26%, what is its expected rate of return?

Company A makes annual USD payments of 6% on a notional of USD 2,265,000. Company A receives annual GBP payments of 7% on a notional of GBP 1,500,000. Assume that the USD and GBP interest rates are rUSD = 4% and rGBP = 6%. The swap currently has 4 years until it matures. The next cash flow exchange will occur one year from today. If the current USD/GBP spot rate XNUSD/GBP = 1.45, what is the value of this currency swap for company A?

Photochronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt–equity ratio of .68. It’s considering building a new $65.8 million manufacturing facility. This new plant is expected to generate aftertax cash flows of $7.83 million in perpetuity. There are three financing options:

1. A new issue of common stock: The required return on the company’s new equity is 15 percent.
2. A new issue of 20-year bonds: If the company issues these new bonds at an annual coupon rate of 7.3 percent, they will sell at par.
3. Increased use of accounts payable financing: Because this financing is part of the company’s ongoing daily business, the company assigns it a cost that is the same as the overall firm WACC. Management has a target ratio of accounts payable to long-term debt of .13. (Assume there is no difference between the pretax and aftertax accounts payable cost.)

If the tax rate is 38 percent, what is the NPV of the new plant? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Round your answer to 2 decimal places, e.g., 32.16.)

Net present value            $

Ward Corp. is expected to have an EBIT of $2,750,000 next year. Depreciation, the increase in net working capital, and capital spending are expected to be $182,000, $119,000, and $132,000, respectively. All are expected to grow at 19 percent per year for four years. The company currently has $21,500,000 in debt and 820,000 shares outstanding. After Year 5, the adjusted cash flow from assets is expected to grow at 3.0 percent indefinitely. The company’s WACC is 9.3 percent and the tax rate is 35 percent.

What is the price per share of the company's stock? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
  
Share price            $

The most recently issued 4 week T-Bill is quoted at a discount of 1.91.

a. What is the price of this T-Bill?

b. What is the bond-equivalent yield?

Assume 4 weeks is 30 days, and the par value is $10,000. Express your answers rounded to two decimal places.

A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term government and corporate bond fund, and the third is a T-bill money market fund that yields a sure rate of 4.7%. The probability distributions of the risky funds are:

The correlation between the fund returns is 0.1065.

What is the Sharpe ratio of the best feasible CAL?

PLEASE DO NOT ROUND ANY NUMBERS UNTIL FINAL ANSWER OR ELSE IT WILL BE INCORRECT.

Sun National Bank is considering adding a new branch bank. They know that it will cost $1.25 million to build the branch and they believe that it will generate $220,000 per year for the next 30 years. Sun National Bank requires a return of 10% on all new projects it undertakes. What is this project’s net present value? (10 points) (Show all calculations for full credit. Simply entering a single value will earn no credit.)

D0=1.00

Dividend is expected to grow at 8% for 10 years, then 5% indefinitely. R=8% for the next 4 years, R=7% for the following 3 years, then 6% indefinitely.

What is today's expected stock price?

A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term government and corporate bond fund, and the third is a T-bill money market fund that yields a rate of 6%. The probability distribution of the risky funds is as follows:

The correlation between the fund returns is 0.09.

What is the Sharpe ratio of the best feasible CAL? (Do not round intermediate calculations. Enter your answers as decimals rounded to 4 places.)

Erika and Kitty, who are twins, have aspirations to become millionaires. Each plans to make a $10,000 annual contribution to her “early retirement fund”, beginning a year from today. Erika plans to open an account with the Safety First Bond Fund, a mutual fund that invests in high-quality bonds whose investors have earned 3 percent per year in the past. Kitty will invest in the New Issue Bio-Tech Fund, which invests in small, newly issued bio-tech stocks and whose investors on average have earned 9 percent per year in the fund’s relatively short history.

a) If the two women’s funds earn the same returns in the future as in the past, how much will each twin have in her account at the end of five years? (Use the step-by-step approach.) (5 points)

b) How long will it take each twin to accumulate $1,000,000? (Use your financial calculator.) (2 points)

c) How large would Erika’s annual contributions need to be for her to become a millionaire in 25 years? (Use your financial calculator.) (1 point)

QPM has sales per share of $48.08, earnings per share of $7.58, book value per share of $20.59, and dividends per share of $3.84. You have determined that relevant market multiples for QPM would be a price/sales ratio of 3.6x, a P/E ratio of 22.8x, a price/book ratio of 8.7x, and a dividend yield of 2.22%. You calculate a QPM price per share based on each ratio, and then estimate the value as the simple average of these four prices. What should be the value per share of QPM? (Enter your answer to the nearest $0.01. Leave the $ sign off. In other words, if your answer is $55.55, enter 55.55 for your answer.)

In 1626, Dutchman Peter Minuit purchased Manhattan Island from a local Native American tribe. Historians estimate that the price he paid for the island was about $24 worth of goods, including beads, trinkets, cloth, kettles, and axe heads. Many people find it laughable that the island would be sold for $24, but you need to consider the future value (FV) of that price in more current times. If the $24 purchase price could have been invested at a 4.75% annual interest rate, what is its value as of 2012 (386 years later)?