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					                       5ae04255-4db0-4850-b3bb-637ddf7a2570.xls




                                       CHAPTER 9 PROBLEMS
                                       THE COST OF CAPITAL

PROBLEM 9-1
INDIVIDUAL OR COMPONENT COSTS OF CAPITAL

DATA
face value                                      1,000.00
coupon interest rate                               11.0%          110.00
flotation cost                                      5.0%
mrkt value                                      1,125.00
years                                                 10
tax rate                                           30.0%
marginal tax rate                                  34.0%

A)
Net price =                                     1,068.75
Cost =                                             9.89%
A-T cost =                                         6.53%

B)
DATA
Div last year                                      1.80
par value                                         15.00
growth rate                                          7%
div/earnings                                        30%
mrkt price                                        27.50
flotation costs                                      5%

Cost =                                           14.37%

C)
DATA
mrkt price                                        43.00
div this yr                                        3.50
growth rate                                          7%
tax rate                                            34%

Cost =                                           15.14%

D)


                                       Page 1
                  5ae04255-4db0-4850-b3bb-637ddf7a2570.xls


DATA
dividend                                        9%
parvalue                                    150.00
flotation costs                                12%
mrkt price                                  175.00

Cost =                                       8.77%

E)
DATA
yield                                          12%
tax rate                                       34%

Cost =                                       7.92%

PROBLEM 9-2
COST OF EQUITY

DATA
mrkt price                                   27.00
Div last yr                                   1.45
growth rate                                     6%
Flotation                                       6%

Cost =                                      12.06%

PROBLEM 9-3
COST OF DEBT

DATA
par value                                  1,000.00
interest                                         7%          70.00
years                                            15
mrkt price                                   958.00
flotation                                       11%
tax rate                                        18%

Net price =                                 852.62
Cost =                                       8.81%
A-T Cost =                                   7.22%

PROBLEM 9-4


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COST OF PREFERRED STOCK

DATA
mrkt price                                      36.00
Dividends                                        3.00
net price                                       32.50

Cost =                                          9.23%

PROBLEM 9-5
COST OF DEBT

DATA
par value                                     1,000.00
net price                                       945.00
coupon rate                                        12%          120.00
years                                               15
tax rate                                           34%

Cost =                                         12.84%
A-T Cost =                                      8.48%

PROBLEM 9-6
COST OF PREFERRED STOCK

DATA
mrkt price                                     115.00
net price                                       98.00
par value                                      100.00
div rate                                          14%

Cost =                                         14.29%

PROBLEM 9-7
COST OF INTERNAL EQUITY

DATA
mrkt price                                      23.80
Dividends                                        0.70
flotation                                         10%
growth rate                                       15%



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                       5ae04255-4db0-4850-b3bb-637ddf7a2570.xls


Cost =                                           18.38%

PROBLEM 9-8
COST OF EQUITY

DATA
mrkt price                                        58.00
flotation                                            8%
div/earnings                                        50%
dividend                                           4.00             8.00
earnings                                           5.00
  5 yrs ago growth =                               0.63
Growth rate                                         10%
marginal tax rate                                   34%

A)
Cost of internal =                               17.59%

B)
Cost of external =                               18.25%

PROBLEM 9-9
COST OF DEBT

DATA
par value                                     1,000.00
coupon rate                                        14%            140.00
years                                               10
rate of return                                      9%
needed funds                                500,000.00
A)
Value =                                           898.47
                                                  422.41
                                                1,320.88

B)
flotation                                         10.50%
net price =                                     1,182.19
C)
How many =                                          423
D)
tax rate                                            25%


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                             5ae04255-4db0-4850-b3bb-637ddf7a2570.xls


Marginal tax rate                                        34%

Cost of Debt =                                        10.92%
A-T Cost =                                             7.21%

PROBLEM 9-10
COST OF DEBT

DATA
par value                                           1,000.00
coupon rate                                               8%            80.00
years                                                     10
rate of return                                            9%
needed funds                                      500,000.00
A.)
i.)
Value =                                               513.41
                                                      422.41
                                                      935.82

ii.)
flotation                                             10.50%
net price =                                           837.56

iii.)
How many =                                               597

iv.)
tax rate                                                 25%
Marginal tax rate                                        34%

Cost of Debt =                                        10.73%
A-T Cost =                                             7.08%

B) Does not have a numerical solution

PROBLEM 9-11
DIVISIONAL COSTS OF CAPITAL

Requires no calculations.

PROBLEM 9-12


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                           5ae04255-4db0-4850-b3bb-637ddf7a2570.xls


WEIGHTED AVERAGE COST OF CAPITAL

DATA
A)
Cash                             $540,000
Accounts Receivable             4,580,000
Inventories                     7,400,000 Long-term Debt              $12,590,000
                              1
Net Property, Plant & Equipment 8,955,000 Common Equity                18,885,000
      Total Assets

Cost of debt financing        8%
Cost of equity               15%
Tax rate                     34%
Market to book ratio           1

Solution:
Market Value
   Component             Proportion         After-tax Cost      Product
   Long-term Debt                           5.28%
   Common Equity                            15.00%


B)


                                         Long-term Debt               $12,590,000
                                         Common Equity                 28,327,500


Cost of debt financing   8%
Cost of equity           13%
Tax rate                 34%
Market to book ratio     1.5

Market Value
Component                Proportion         After-tax Cost      Product
Long-term Debt                              5.28%
Common Equity                               13.00%


PROBLEM 9-13
DIVISIONAL COSTS OF CAPITAL AND INVESTMENT DECISIONS


                                           Page 6
                             5ae04255-4db0-4850-b3bb-637ddf7a2570.xls




DATA
                             Manufacturing        Distribution
                             Division             Division
       Equity beta           1.6                  1.1
       Tax rate              35.00%               35.00%
       Cost of Debt          8.00%                8.00%
       Debt ratio            40.00%               40.00%

       Risk free rate        4.80%
       Market risk premium   7.30%

A)
                                          Manufacturing Division
                                                After-tax
        Component           Proportion            Cost                  Product
       Debt                    40.00%
       Equity                  60.00%
                        Divisional WACC


                                           Distribution Division
                                                  After-tax
            Component       Proportion            Cost                  Product
       Debt                    40.00%
       Equity                  60.00%
                        Divisional WACC

MINI CASE


DATA
Flotation costs:
 Bond                                                      15%
 P/S                                                      2.01
Div for C/S                                               2.50
Div for P/S                                               1.50
growth                                                      6%
Bond
 Coupon                                                      8%                   80.00
 Par Value                                             1,000.00
 Years                                                       16


                                              Page 7
                               5ae04255-4db0-4850-b3bb-637ddf7a2570.xls


tax rate                                                     34%
Mrkt prices
  Bonds                                                  1,035.00
  P/S                                                       19.00
  C/S                                                       35.00

A.
% of Mix
 Bonds                                                       38%
 P/S                                                         15%
 C/S                                                         47%

Bond's Cost of Capital
 Net Price =                                              879.75

 Cost of Capital =                                         9.49%
 After-tax COC =

Preferred Stock's Cost of Capital
 Net Price =                                               16.99

 Cost of Capital =

Internal Common Stock's Cost of Capital
 Market Price =                                            35.00

 Cost of Capital =

Weighted Cost of Capital Using Internal Funds

Debt =
P/S =
C/S =


B.
External Common Stock's Cost of Capital
 Net Price =                                               32.55

 Cost of Capital =

Weighted Cost of Capital Using External Funds


                                                Page 8
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Debt =
P/S =
C/S =




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S
L




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Market Value
Balance Sheet
  $12,590,000
   18,885,000




Market Value
Balance Sheet
  $12,590,000
   42,491,250




                                Page 15

				
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