Question 38 Alpha's capital structure consists only of common stock (20 million shares), but the firm is planning a major expansion which will require $100 million of new capital. Alpha has a choice of obtaining the needed capital through the sale of 5 million shares of common stock at $20 per share or the sale of $100 million of first mortgage bonds that would have a coupon rate of 9%. If Alpha has a marginal tax rate of 40%, calculate the EBIT-EPS indifference point. ○ $45 million O $35 million O $54 million O $22 million
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- Hasting Corporation is interested in acquiring Vandell Corporation. Vandell has 1 million shares outstanding and a target capital structure consisting of 30% debt; its beta is 1.4 (given its target capital structure). Vandell has $10.82 million in debt that trades at par and pays an 8% interest rate. Vandell’s free cash flow (FCFJ is $2 million per year and is expected to grow at a constant rate of 5% a year. Vandell pays a 40% combined federal and state tax rate. The risk-free rate of interest is 5%, and the market risk premium is 6%. Hasting’s First step is to estimate the current intrinsic value of Vandell. What are Vandell’s cost of equity and weighted average cost of capital? What is Vandell’s intrinsic value of operations? [Hint: Use the free cash flow corporate valuation model from Chapter 8.) What is the current intrinsic value of Vandell’s stock?Choo Choo Corp. is an all- equity firm with a market value of $5, 200, 000. The firm is considering a debt issue of $3, 900, 000 at an 8% interest rate and will use the funds to buy back shares in the firm. There are currently 200, 000 shares outstanding and it is a perfect capital market. 14. If the firm keeps its current capital structure and the EBIT is expected to be $750, 000, what would be Choo-Choo's EPS? A) $3.75 B) $8.76 C) $15.00 D) $2.19 E) $ 5.00 15. What is the breakeven level of EBIT between the two capital structures? A) $ 1, 664, 000 B) $1, 333, 333 C) $2, 100, 000 D) $554, 667 E) $416, 000Question One : LOFTA Corporation is interested in measuring the cost of each specific type of capital as well as the weighted average cost of capital. Historically, the firm has raised capital in the following manner: The tax rate of the firm is currently 30%. The needed financial information and data are as follows: Debt LOFTA can raise debt by selling $1,000-par-value, 6.5% coupon interest rate, 10-year bonds on which annual interest payments will be made. To sell the issue, an average discount of $20 per bond needs to be given. There is an associated flotation cost of 2% of par value. Preferred stock Preferred stock can be sold under the following terms: The security has a par value of $100 per share, the annual dividend rate is 6% of the par value, and the flotation cost is expected to be $4 per share. The preferred stock is expected to sell for $102 before cost considerations. Common stock The current price of Nova’s common stock is $35 per share. The cash dividend is expected to…
- Question One : LOFTA Corporation is interested in measuring the cost of each specific type of capital as well as the weighted average cost of capital. Historically, the firm has raised capital in the following manner: The tax rate of the firm is currently 30%. The needed financial information and data are as follows: Debt LOFTA can raise debt by selling $1,000-par-value, 6.5% coupon interest rate, 10-year bonds on which annual interest payments will be made. To sell the issue, an average discount of $20 per bond needs to be given. There is an associated flotation cost of 2% of par value. Preferred stock Preferred stock can be sold under the following terms: The security has a par value of $100 per share, the annual dividend rate is 6% of the par value, and the flotation cost is expected to be $4 per share. The preferred stock is expected to sell for $102 before cost considerations. Common stock The current price of Nova’s common stock is $35 per share. The cash dividend is expected…Assume Tiger Corporation needs to raise in capital so it can expand its operational activities. Company issues and sells 33,000 shares of stock at $13 each to raise the money which expect to provide a return of 5.8%. Furthermore, they sell 33,000 bonds for $50 each to raise the other in capital with expected rate of return of 9.5% where tax rate is 15%. What would be the effect of this financing on WACC if industry average is 5%?.Your PE firm is considering acquiring a publicly traded digital advertising company, Star Dust Enterprises (SDE). The following are some key statistics of the stock of SDE today (t = 0). SDE is 100% equity financed. Its cost of capital (apply this to all cash flows) is 11.2% and the payout ratio is 79%. Expected earnings per share of SDE at next year (t = 1) are $6.6. Assume that without new investments, expected earnings of SDE would remain at their time-1 level in perpetuity. All future investments are expected to generate $0.2 in incremental earnings for each $1 of investment. For an investment made at time t, incremental cash flows are generated starting in year t + 1. (a) Compute expected dividend per share of SDE next year (t = 1): $ (b) Compute expected dividend per share of SDE two years from now (t = 2): $ (c) What is the present value of growth opportunities (PVGO) of SDE today? $
- Question One : LOFTA Corporation is interested in measuring the cost of each specific type of capital as well as the weighted average cost of capital. Historically, the firm has raised capital in the following manner: The tax rate of the firm is currently 30%. The needed financial information and data are as follows: Debt LOFTA can raise debt by selling $1,000-par-value, 6.5% coupon interest rate, 10-year bonds on which annual interest payments will be made. To sell the issue, an average discount of $20 per bond needs to be given. There is an associated flotation cost of 2% of par value. Preferred stock Preferred stock can be sold under the following terms: The security has a par value of $100 per share, the annual dividend rate is 6% of the par value, and the flotation cost is expected to be $4 per share. The preferred stock is expected to sell for $102 before cost considerations. Common stock The current price of Nova’s common stock is $35 per share. The cash dividend is expected…Use the following information to answer the question(s) below. Nielson Motors is currently an all equity financed firm. It expects to generate EBIT of $20 million over the next year. Currently Nielson has 8 million shares outstanding and its stock is trading at $20.00 per share. Nielson is considering changing its capital structure by borrowing $50 million at an interest rate of 8% and using the proceeds to repurchase shares. Assume perfect capital markets. Nielson's EPS if they change their capital structure is closest to: OA. $2.30 O B. $2.90 O C. $2.50 O D. $2.00ensen's, an all-equity firm, has a total market value of $548,000. The firm is thinking of adding $262,000 of debt at an interest rate of 6% and using the proceeds to buy back shares. What would be the firm's weighted average cost of capital after it adds the debt if the firm pays a tax rate of 40% and its unlevered cost of equity is 12.6%? Question 14 options: A) 15.25% B) 9.95% C) 16.23% D) 10.19% E) 10.57%
- Lancaster Engineering Inc. (LEI) has the following capital structure, which it considers to be optimal:Debt 25% Preferred stock 15% Common equity 60% Total 100%LEI is expected to pay a dividend of $3.24 per share next year, its stock currently sells for $54 per share, and investors expect dividends to grow at a constant rate of 9 percent in the future. LEI’s tax rate is 40 percent.LEI can obtain new capital in the following ways:• New preferred stock with a dividend of $9.5 can be sold to the public at a price of $95 per share.• Debt can be sold at an interest rate of 12 percent.a. Determine the cost of each capital component.b. Calculate the WACC.3|Page4 c. LEI has the following investment opportunities that are average-risk projects for the firm:Project ABCDECost at t = 0$10,000 20,000 10,000 20,000 10,000Rate of Return16.4% 15.0% 13.2% 12.0% 11.5%Which projects should LEI accept? Why?Lancaster Engineering Inc. (LEI) has the following capital structure, which it considers to be optimal: Debt 25% Preferred stock 15% Common equity 60% Total 100% LEI is expected to pay a dividend of $3.24 per share next year, its stock currently sells for $54 per share, and investors expect dividends to grow at a constant rate of 9 percent in the future. LEI’s tax rate is 40 percent. LEI can obtain new capital in the following ways: • New preferred stock with a dividend of $9.5 can be sold to the public at a price of $95 per share. • Debt can be sold at an interest rate of 12 percent. Calculate the WACC.Lancaster Engineering Inc. (LEI) has the following capital structure, which it considers to be optimal:Debt 25% Preferred stock 15% Common equity 60% Total 100%LEI is expected to pay a dividend of $3.24 per share next year, its stock currently sells for $54 per share, and investors expect dividends to grow at a constant rate of 9 percent in the future. LEI’s tax rate is 40 percent.LEI can obtain new capital in the following ways:• New preferred stock with a dividend of $9.5 can be sold to the public at a price of $95 per share.• Debt can be sold at an interest rate of 12 percent.a. Determine the cost of each capital component.b. Calculate the WACC.
