Assume that you were recently hired as assistant to Jerry Lehman, financial VP of Coleman Technologies. Your first task is to estimate Coleman’s cost of capital. Lehman has provided you with the following data, which he believes is relevant to your task:

The firm’s marginal tax rate is 40%.

The current price of Coleman’s 12 % coupon, semiannual payment, noncallable bonds with 15 years remaining to maturity is $1,153.72. New bonds would be privately placed with no flotation cost.

The current price of the firm’s 10%, $100 par value, quarterly dividend, perpetual preferred stock is $113.10. Coleman would incur flotation costs of $2 per share on a new issue.

Coleman’s common stock is currently selling at $50 per share. Its last dividend (D₀) was $4.19, and dividends are expected to grow at a constant rate of 5% in the foreseeable future. Coleman’s beta is 1.2, the yield on Treasury bonds is 7%, and the market risk premium is estimated to be 6%. For the bond-yield-plus-risk-premium approach, the firm uses a four-percentage point risk premium.

Up to $300,000 of new common stock can be sold at a flotation cost of 15%. Above $300,000, the flotation cost would rise to 25%.

Coleman’s target capital structure is 30 %long-term debt, 10% preferred stock, and 60% common equity.

The firm is forecasting retained earnings of $300,000 for the coming year.

Question:

j.       (1)     What is Coleman’s overall, or weighted average, cost of capital ( WACC) when retained earnings are used as the equity component?

(2)     What is the WACC after retained earnings have been exhausted and Coleman uses up to $300,000 of new common stock with a 15% flotation cost?

During the last few years, Jana Industries has been too constrained by the high cost of capital to make many capital investments. Recently, though, capital costs have been declining, and the company has decided to look seriously at a major expansion program proposed by the marketing department. Assume that you are an assistant to Leigh Jones, the financial vice president. Your first task is to estimate Jana’s cost of capital. Jones has provided you with the following data, which she believes may be relevant to your task:

The firm’s tax rate is 25%. The current price of Jana’s 12% coupon, semiannual payment, noncallable bonds with 15 years remaining to maturity is $1,153.72. There are 70,000 bonds. Jana does not use short-term interest-bearing debt on a permanent basis. New bonds would be privately placed with no flotation cost. The current price of the firm’s 10%, $100 par value, quarterly dividend, perpetual preferred stock is $116.95. There are 200,000 outstanding shares. Jana would incur flotation costs equal to 5% of the proceeds on a new issue. Jana’s common stock is currently selling at $50 per share. There are 3 million outstanding common shares. Its last dividend was $3.12, and dividends are expected to grow at a constant rate of 5.8% in the foreseeable future. Jana’s beta is 1.2, the yield on T-bonds is 5.6%, and the market risk premium is estimated to be 6%. For the own-bond-yield-plus-judgmental-risk-premium approach, the firm uses a 3.2% risk premium

1. What is your final estimate for the cost of equity, ?

2. Jana’s target capital structure is 30% long-term debt, 10% preferred stock, and 60% common equity. How does this compare with the current market value capital structure?

3. Use Jana’s target weights to calculate the weighted average cost of capital (WACC).

During the last few years, Jana Industries has been too constrained by the high cost of capital to make many capital investments. Recently, though, capital costs have been declining, and the company has decided to look seriously at a major expansion program proposed by the marketing department. Assume that you are an assistant to Leigh Jones, the financial vice president. Your first task is to estimate Jana’s cost of capital. Jones has provided you with the following data, which she believes may be relevant to your task:

● The firm’s tax rate is 25%.

● The current price of Jana’s 12% coupon, semiannual payment, noncallable bonds with 15 years remaining to maturity is $1,153.72. There are 70,000 bonds. Jana does not use short-term interest-bearing debt on a permanent basis. New bonds would be privately placed with no flotation cost.

● The current price of the firm’s 10%, $100 par value, quarterly dividend, perpetual preferred stock is $116.95. There are 200,000 outstanding shares. Jana would incur flotation costs equal to 5% of the proceeds on a new issue.

● Jana’s common stock is currently selling at $50 per share. There are 3 million outstanding common shares. Its last dividend (D0) was $3.12, and dividends are expected to grow at a constant rate of 5.8% in the foreseeable future. Jana’s beta is 1.2, the yield on T-bonds is 5.6%, and the market risk premium is estimated to be 6%. For the own-bond-yield-plus judgmental-risk-premium approach, the firm uses a 3.2% risk premium. To help you structure the task, Leigh Jones has asked you to answer the following questions:

Question:

Jana’s target capital structure is 30% long-term debt, 10% preferred stock, and 60% common equity. How does this compare with the current market value capital structure?

n this paper, please discuss the following case study. In doing so, explain your approach to the problem, support your approach with references, and execute your approach. Provide an answer to the case study’s question with a recommendation.

You are the owner of a parasailing company that is expanding operations to a new beachfront location, and you need to prepare a three-year analysis for the bank that may loan you the funds to purchase your boat and parasailing equipment. Because of your well-established reputation, you already have received requests for “flights” to be scheduled as soon as you open the new location. Therefore, you expect to break-even the first year but must calculate the number of flights needed. You also need to determine the new break-even point in Year 2 if the location allows referrals, which you believe will average about 2% of the sales price overall. Finally, you need to determine the volume needed to have $10,000 in profit in Year 3. The following information is available:

• Sales price per flight $175
• Estimated loan payment per month $350
• Fuel costs per flight $100
• Full-time scheduler salary $2,500 per month
• Boat crew per flight $30
• $500 per month dock fee and use of a small office on the pier

Requirements:

• Calculate the Year 1 break-even quantity, contribution margin, and contribution margin ratio. Explain how the values were determined.
• Calculate the Year 2 break-even quantity, break-even sales, and contribution margin ratio. Explain how the values were determined.
• Determine the number of flights (units) needed to retain a profit of $10,000 in Year 3, assuming the company does allow for referrals.
• Recommend if the bank should issue the loan.

You are in charge of the bond trading and forward loan department of a large investment bank. You have the following YTM’s for five default-free pure discount bonds as displayed on your computer terminal: Years of Maturity 1 2 3 4 5 YTM 0.06 0.065 0.07 0.065 0.08 Where YTM denotes the yield to maturity of a default free pure discount bond (zero coupon bond) maturing at year j. a) A new summer intern from Harvard has just told you that he thinks that 3 year treasury notes with annual coupons of $100 and face value of $1,000 are trading for $1,000. Would you ask the intern to recheck the price of this coupon bond? If so, why? If there is one actually traded for $1,000, how would you take this opportunity? b) A client approaches you looking for an annualized quote on a forward loan of $5 million dollars to be received by the customer at the end of the third year and she will repay the loan at the end of the fifth year. How would you structure your holdings of pure discount bonds so you can exactly match the future cash flows of this loan? Please indicate the number of bonds to be purchased or sold and the involved cost/benefit in dollar terms. What is the corresponding annualized forward interest rate you quote for your client? c) Suppose that you purchased the bond in part 1(a) at the price you calculated. It is now one year later and you just received the first coupon payment on the bond. At this time, the yield to maturities up to 3 year pure discount bonds are Years to maturity 1 2 3 4 5 YTM 0.08 0.095 0.09 0.075 0.06 If you were to sell the bond now, what rate of return would you realize on your investment in the bond?

On January 1, 2018, CT Ltd issued $20 million convertible bonds. The bonds have a life of three years and are issued at 21 million with a face value of $100 per bond. The bonds pay an interest of 6% annually in arrears. The holder of each bond is entitled to convert the bond into 25 ordinary shares of CT Ltd at any time up to maturity.

Companies of a similar risk profile have recently issued debt with similar terms, but without the option of conversion, and the market required a rate of return of 10% per annum on such securities. It is considered that investors in CT Ltd’s convertible bonds are preparing to take a lower return as a result of the facility to convert the bonds to shares.

On January 1, 2020, $5,000,000 of the convertible bonds are converted to ordinary shares of CT Ltd. The remaining bonds are redeemed on the maturity date.

Instead of issuing new shares upon conversion, CT Ltd satisfies the requirement for equity shares to be delivered to the bondholders through the use of treasury shares. On December 31 2018, CT Ltd. reacquired 2,000,000 of its ordinary shares at a price of $4 per share.

Required:

1.     Discuss the classifications of the convertible bonds issued on January 1, 2018.

Give reasons for your answer.   

2.     Provide the journal entries to account for:

        (a) The issue of the above securities;

        (b) The payment of the first year’s interest;

        (c) The reacquiring of the treasury shares;

(d) The conversion of the securities to ordinary shares. Rather than issuing new ordinary shares, CT will deliver to bondholders of its own shares that it had previously repurchased and held as treasury shares;   

        (e) The interest payment and redemption of the bonds at the end of 2020; and   

(f) The remaining treasury shares which were reacquired on December 31, 2018 were reissued at a price of $6 per share at December 31, 2020.

Suppose that a monopoly firm finds that its MR is $54 for the first unit sold each day, $53 for the second unit sold each day, $52 for the third unit sold each day, and so on. Further suppose that the first worker hired produces 5 units per day, the second 4 units per day, the third 3 units per day, and so on. Instructions: Enter your answers as whole numbers. a. What is the firm’s MRP for each of the first five workers? b. Suppose that the monopolist is subjected to rate regulation and the regulator stipulates that it must charge exactly $44 per unit for all units sold. At that price, what is the firm’s MRP for each of the first five workers? c. If the daily wage paid to workers is $186 per day, how many workers will the unregulated monopoly demand? worker(s). If the daily wage paid to workers is $186 per day, how many workers will the regulated monopoly demand? worker(s). Looking at those figures, will the regulated or the unregulated monopoly demand more workers at that wage? . d. If the daily wage paid to workers falls to $85 per day, how many workers will the unregulated monopoly demand? worker(s). If the daily wage paid to workers falls to $85 per day, how many workers will the regulated monopoly demand? worker(s). Looking at those figures, will the regulated or the unregulated monopoly demand more workers at that wage? . e. Comparing your answers to parts c and d, does regulating a monopoly’s output price always increase its demand for resources?

Suppose that a monopoly firm finds that its MR is $66 for the first unit sold each day, $65 for the second unit sold each day, $64 for the third unit sold each day, and so on. Further suppose that the first worker hired produces 5 units per day, the second 4 units per day.

A. What is the firm's MRP for each of the first five workers?

B. Suppose that the monopolist is subjected to rate regulation and the regulator stipulates that it must charge exactly $56 per unit for all units sold. At that price, what is the firm's MRP for each of the first five workers?

C. If the daily wage paid to workers is $234 per day, how many workers will the unregulated monopoly demand?

D. ID the daily wage paid to workers is $234 per day, how many workers will the regulated monopoly demand?

E. Looking at those figures, will the regulated or the unregulated monopoly demand more workers at that wage?

F. If the daily wage paid to workers falls to $109 per day, how many workers will the unregulated monopoly demand?

G. If the daily wage paid to workers falls to $109 per day, how many workers will the regulated monopoly demand?

H. Looking at those figures, will the regulated or the unregulated monopoly demand more workers at that wage?

I. Comparing your answers to parts c and d, does regulating a monopoly's output price always increase its demand for resources?

Sea Side, Inc., just paid a dividend of $1.68 per share on its stock. The growth rate in dividends is expected to be a constant 5.5 percent per year indefinitely. Investors require a return of 18 percent on the stock for the first three years, then a return of 13 percent for the next three years, and then a return of 11 percent thereafter. What is the current share price?

Tango Company is planning to acquire Delta Company. The additional pre-tax income from the acquisition will be $300,000 in the first year, but it will increase by 2% in future years. Because of diversification, the beta of Tango will decrease from 1.2 to 0.8. Currently the return on the market is 9% and the riskless rate is 4%. What is the maximum price that Tango should pay for Delta? The tax rate of Tango is 35%.