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Chap Solutions Paper

Words: 622, Paragraphs: 7, Pages: 3

Paper type: Essay , Subject: Solutions

You are considering a new project that has 50 recent more beta risk than your firm’s assets currently have, that is, its beta is 50 percent larger than the firm’s existing beta. The expected return on the new project is 18 percent. Should the project be accepted if beta risk is the appropriate risk measure? Pure play method 4. Interstate Transport has a target capital structure of 50 percent debt and 50 percent common equity. The firm is considering a new independent project that has an expected return of 13 percent and is not related to transportation.

However, a pure play proxy firm has been identified that is exclusively engaged in the new line of business. The proxy firm has a beta of 1. 38. Both firms have a marginal tax rate of 40 percent, and Interstates before-tax cost of debt is 12 percent. The risk-free rate is 10 percent and the market risk premium is S percent. What should the firm do? S. Longest Corporation has a target capital structure that consists of 30 percent debt, 50 percent common equity, and 20 percent preferred stock. The tax rate is 30 percent. The company has projects in which it would like to invest faith costs that total $1,500,000.

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Longest will retain $500,000 of net income this year. The last dividend was $5, the current stock price is 575, and the growth rate f the company is 10 percent. If the company raises capital through a new equity issuance, the notation costs are ICC percent. The cost Of preferred stock is 9 percent and the cost of debt is 7 percent. (Assume debt and preferred stock have no notation costs. ) What is the weighted average cost Of capital at the firm’s optimal capital budget? 6. Lamina Motors just reported earnings per share of $2. 00.

The stock has a price earnings ratio of 40, so the stock’s current price is $80 per share. Analysts expect that one year from now the company will have an PEPS of $2. 40, and it will pay its first dividend of SSL . 00 per share. The stock has a required return of 10 percent. What price earnings ratio must the stock have one year trot now so that investors realize their expected return? Heavy Metal Corp.. Is a steel manufacturer that finances its operations with 40 percent debt, 10 percent preferred stock, and SO percent equity, The interest rate on the company’s debt is 11 percent.

The preferred stock pays an annual dividend of 52 and sells for 520 a share. The company’s common stock trades at $30 a share, and its current dividend (DO) of $2 a share is expected to grow at a constant rate of 8 percent per year _ The flotation cost Of external equity s 15 percent of the dollar amount issued, while the flotation cost on preferred stock is 10 percent. The company estimates that its WAC is 12. 30 percent. Assume that the firm will not have enough retained earnings to fund the equity portion Of its capital budget.

What is the company’s tax rate?

Anderson Company has four investment opportunities with the following costs (paid at t – 0) and expected returns: Expected Project Cost C $2,000 3, coo 5, COO 3,000 Return 16. 0% 14. 5 11. 5 The company has a target capital structure that consists of 40 percent common equity, 40 percent debt, and 20 percent preferred stock. The company has 51,000 in retained earnings. The company expects its year-end dividend to be $3. 00 per share (DID = 001 The dividend is expected to grow at a constant rate of S percent a year. The company’s stock price is currently $42. 75.

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