Question

The MS Pony Entertainment Company is trying to determine its weighted average cost of capital for use in making several investment decisions. The firm's bonds were issued 6 years ago and have 14 years left until maturity. They carry an 8% coupon rate paid/compounded annually and are currently selling for $962.50. The firm's preferred stock carries a $4.60 dividend and is currently selling at $42.50 per share. Investment dealers have stated that floatation costs for new preferred will be 50 cents per share. The firm has significant retained earnings but will also need to sell new common stock to finance the projects it is now considering. MS is expected to pay a $2.50 per share dividend next year and is expected to maintain an 8% growth rate for the foreseeable future. The stock is currently priced at $50 per share, but new common stock will have flotation costs of 60 cents per share. Calculate the costs of the various components of MS. The firm's tax rate is 44%

Answer 1

	Frequency in a year	1
	Coupon rate	8.00%
	Face value	$       1,000
	Coupon payment	$       80.00	=1000*8%/1
		8.00%						9.00%
Year	Cash Flow	PV factor = 1/ (1+r)^t	PV					PV factor = 1/ (1+r)^t	PV
0	$                  (962.50)	1.000	$   (962.50)					1.000	$   (962.50)
1	$                      80.00	0.926	$       74.07					0.917	$       73.39
2	$                      80.00	0.857	$       68.59					0.842	$       67.33
3	$                      80.00	0.794	$       63.51					0.772	$       61.77
4	$                      80.00	0.735	$       58.80					0.708	$       56.67
5	$                      80.00	0.681	$       54.45					0.650	$       51.99
6	$                      80.00	0.630	$       50.41					0.596	$       47.70
7	$                      80.00	0.583	$       46.68					0.547	$       43.76
8	$                      80.00	0.540	$       43.22					0.502	$       40.15
9	$                      80.00	0.500	$       40.02					0.460	$       36.83
10	$                      80.00	0.463	$       37.06					0.422	$       33.79
11	$                      80.00	0.429	$       34.31					0.388	$       31.00
12	$                      80.00	0.397	$       31.77					0.356	$       28.44
13	$                      80.00	0.368	$       29.42					0.326	$       26.09
14	$                      80.00	0.340	$       27.24					0.299	$       23.94
14	$                 1,000.00	0.340	$     340.46					0.299	$     299.25
		Total	$       37.50					Total	$     (40.36)
NPV @ 0.08	37.50
NPV @ 0.09	(40.36)
Difference in both	77.86
YTM	=Lower rate + Difference in rates*(NPV at lower rate)/(Lower rate NPV-Higher rate NPV)
	'=8%+ (9%-8%)*(37.499/(37.499+40.361)
YTM	8.48%
Annual YTM=	8.48%
Tax rate	44.00%
After-tax cost	=8.48%*( 1-44%)
After-tax cost	4.75%
Cost of preferred stock
Preferred dividend	$                        4.60
Market price per share (42.50-0.50)	$                      42.00			jeff jeffy Next > < Previous Related Solutions As CFO of ACL you are trying to determine the firm's weighted average cost of capital... As CFO of ACL you are trying to determine the firm's weighted average cost of capital (WACC). You have gathered the following information: The firm has 1,500 $1,100 face value bonds trading at par. The yield to maturity is 7.28%. The firm has 40,000 preferred shares trading at $50 per share and has a dividend yield of 5.14%. The book value of the preferred shares is $1,600,000. The firmhas 75,000 common shares of stock trading at $60 per share. The... Define the Average Cost of Capital (Weighted Average Cost of Capital) and explain why a company... Define the Average Cost of Capital (Weighted Average Cost of Capital) and explain why a company should earn at least its weighted average cost of capital in new investments. What are the financial implications if it does not? Silver Sun Entertainment has a weighted-average cost of capital of 8.22 percent and is evaluating two... Silver Sun Entertainment has a weighted-average cost of capital of 8.22 percent and is evaluating two projects: A and B. Project A involves an initial investment of 5,756 dollars and an expected cash flow of 8,519 dollars in 6 years. Project A is considered more risky than an average-risk project at Silver Sun Entertainment, such that the appropriate discount rate for it is 0.86 percentage points different than the discount rate used for an average-risk project at Silver Sun Entertainment.... Silver Sun Entertainment has a weighted-average cost of capital of 8.22 percent and is evaluating two... Silver Sun Entertainment has a weighted-average cost of capital of 8.22 percent and is evaluating two projects: A and B. Project A involves an initial investment of 5,756 dollars and an expected cash flow of 8,519 dollars in 6 years. Project A is considered more risky than an average-risk project at Silver Sun Entertainment, such that the appropriate discount rate for it is 0.86 percentage points different than the discount rate used for an average-risk project at Silver Sun Entertainment.... The weighted average cost of capital is determined by _____ the weighted average cost of equity.... The weighted average cost of capital is determined by _____ the weighted average cost of equity. a. multiplying the weighted average aftertax cost of debt by b. adding the weighted average pretax cost of debt to c. adding the weighted average aftertax cost of debt to d. dividing the weighted average pretax cost of debt by e. dividing the weighted average aftertax cost of debt by The weighted average cost of capital (WACC) is calculated as the weighted average of cost of... The weighted average cost of capital (WACC) is calculated as the weighted average of cost of component capital, including debt, preferred stock and common equity. In general, debt is less expensive than equity because it is less risky to the investors. Some managers may intend to increase the usage of debt, therefore increase the weight on debt (Wd). Do you think by increasing the weight on debt (Wd) will reduce the WACC infinitely? What are the benefits and costs of... Assuming that the company uses the CAPM to calculate its cost of equity. Calculate its weighted average cost of capital. Royta Ltd, operates in the commercial painting industry. They have reluctantly come to the conclusion that some of their older equipment is reaching the end of its productive life and will need to be replaced sooner or later. They have asked for your assistance in determining their cost of capital in order to make this decision. Their present capital structure is as follows: 1 200 000 R2 ordinary shares now trading at R2,20 per share.  80 000 preference shares... The Banana Corp. An agriculture company needs to find its weighted average cost of capital to... The Banana Corp. An agriculture company needs to find its weighted average cost of capital to analyze an expansion project. The firm is currently financed with debt, preference capital and ordinary equity. The firm faces a company tax rate of 25%. The following information is available. Debt: The firm currently has 20,000 bonds on issue. The current market value of each bond is $920 the before tax cost of issuing new bonds would be 6% per annum. Preference Capital: The... Bremond Equipment Supply Corporation (BESC) needs to determine its Weighted Average Cost of Capital in order... Bremond Equipment Supply Corporation (BESC) needs to determine its Weighted Average Cost of Capital in order to make a few capital budgeting decisions. The firm has already established the proporation of its capital. Use these proportions in calculating the firm's WAAC. Target Market Source of Capital Proportions Long-term debt 30% Preferred stock 5% Common stock equity 65% Debt: The firm can sell a 10-year, $1,000 par value, 7 percent bond for $950. A flotation cost of 3percent of the par... Bremond Equipment Supply Corporation (BESC) needs to determine its Weighted Average Cost of Capital in order... Bremond Equipment Supply Corporation (BESC) needs to determine its Weighted Average Cost of Capital in order to make a few capital budgeting decisions. The firm has already established the proporation of its capital. Use these proportions in calculating the firm's WAAC. Target Market Source of Capital Proportions Long-term debt 30% Preferred stock 5% Common stock equity 65% Debt: The firm can sell a 10-year, $1,000 par value, 7 percent bond for $950. A flotation cost of 3percent of the par... ADVERTISEMENT Subjects Accounting Advanced Math Anatomy and Physiology Biology Chemistry Civil Engineering Computer Science Economics Electrical Engineering Finance History Math Mechanical Engineering Operations Management Physics Psychology Statistics and Probability Nursing Other ADVERTISEMENT Latest Questions Ten-year zero coupon bonds issued by the U.S. Treasury have a face value of $1,000 and... The Blossom Department of Transportation has issued 25-year bonds that make semiannual coupon payments at a... Please answer all 4 parts of this question John Johnson just received a cash gift from... Question #1 C4H10O with a butanol combustion cycle (formation enthalpy-332,000 kJ / kmol) 25 per cent... Suppose a survey revealed that 19% of 494 respondents said they had in the past sold... Topic: Choose a company which are you are starting, and a main product or service that... 4. Why did the United States and the Soviet Union find themselves in a “Cold War”... ADVERTISEMENT About @ 2020 WizEdu