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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 =
A-T cost =

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 =

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

Cost =

D)

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

Cost =

E)
DATA
yield                                          12%
tax rate                                       34%

Cost =

PROBLEM 9-2
COST OF EQUITY

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

Cost =

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 =
A-T Cost =

PROBLEM 9-4

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COST OF PREFERRED STOCK

DATA
mrkt price                                      36.00
Dividends                                        3.00
net price                                       32.50

Cost =

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 =
A-T Cost =

PROBLEM 9-6
COST OF PREFERRED STOCK

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

Cost =

PROBLEM 9-7
COST OF INTERNAL EQUITY

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

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Cost =

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 =

B)
Cost of external =

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

B)
flotation                                        10.50%
net price =
C)
How many =
D)
tax rate                                            25%

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Marginal tax rate                                          34%

Cost of Debt =
A-T Cost =

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

ii.)
flotation                                               10.50%
net price =

iii.)
How many =

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

Cost of Debt =
A-T Cost =

B) Does not have a numerical solution

PROBLEM 9-11
DIVISIONAL COSTS OF CAPITAL

Requires no calculations.

PROBLEM 9-12

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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

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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%

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

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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

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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

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