Question 1 10 points
1 Calculating Cost of Equity: The Diving Corporation’s common stock has a beta of 1.21. If the risk- free rate is 3.5 percent and the expected return on the market is 11 percent, what is Diving’s cost of equity capital?
Question 2 -10 points
Calculating Cost of Debt: Shaken Corp. issued a 30-year, 6.2 percent semi-annual bond 7 years ago. The bond currently sells for 108 percent of its face value. The company’s tax rate is 35 percent
(a.) What is the pretax cost of debt?
(b). What is the after-tax cost of debt?
(c) Which is more relevant, the pre-tax or the after-tax cost of debt? Why?
Question 3 - 15 points
Calculating WACC Molineux Corporation has a target capital structure of 70 percent common stock and 30 percent debt. Its cost of equity is 13 percent, and the cost of debt is 6 percent. The relevant tax rate is 35 percent. What is Mullinax’s WACC?
Question 4 - 65 points
Kellogg’s wants to expand its cereal business by acquiring Major foods company. Kellogg’s currently has debt outstanding with a market value of $150 million and a YTM of 7 percent. The company’s market capitalization is $390 million, and the required return on equity is 12 percent. Major foods have debt outstanding with a market value of $32 million. The EBIT for Major Foods is projected to be $14 million. EBIT is expected to grow at 11 percent per year for the next five years before slowing to 2 % in perpetuity. Net working capital, capital spending, and depreciation as a percentage of EBIT are expected to be 10 percent, 15 percent, and 9 percent, respectively. Major Foods has 2 million shares outstanding, and the tax rate for both companies is 40 percent.
(a). What is the maximum share price do you think Kellogg’s should to pay for Major foods stock?
(b.) Would you recommend that Kellogg’s purchase Major foods? Why?
Problem 9-2
After-Tax Cost of Debt
LL Incorporated’s currently outstanding 11% coupon bonds have a yield to maturity of 12%. LL believes it could issue new bonds at par that would provide a similar yield to maturity. If its marginal tax rate is 40%, what is LL’s after-tax cost of debt? Round your answer to two decimal places.
%
Problem 9-5
Cost of Equity: Dividend Growth
Summer dahl Resort’s common stock is currently trading at $38.00 a share. The stock is expected to pay a dividend of $1.50 a share at the end of the year (D1 = $1.50), and the dividend is expected to grow at a constant rate of 8% a year. What is the cost of common equity? Round your answer to two decimal places.
Weldon Industrial Gas Corporation supplies acetylene and other compressed gases to
industry. Data regarding the store’s operations follow:
• Sales are budgeted at $360,000 for November, $380,000 for December, and
$350,000 for January.
• Collections are expected to be 75% in the month of sale, 20% in the month following
the sale, and 5% uncollectible.
• The cost of goods sold is 65% of sales.
• The company desires an ending merchandise inventory equal to 60% of the cost of
goods sold in the following month.
• Payment for merchandise is made in the month following the purchase.
• Other monthly expenses to be paid in cash are $21,900.
• Monthly depreciation is $20,000.
• Ignore taxes
Assume you are the Chief Executive Officer of a publicly traded conglomerate with five separate operating units. Each of these units is in an industrial sector of the USA economy, with very limited international business. These operating units consist of automotive parts manufacturing, oil field supply, medical supplies manufacturing, transportation, and agricultural chemical manufacturing.
Your company has a market value (i.e. market capitalization) of thirty billion dollars. The company’s stock trades at eleven times trailing earnings and twelve times projected earnings, and has a Beta of .95.
The assignment is to estimate the weighted average cost of capital (WACC) for an actual corporation as of the current time. Actual managers would need to know their company’s WACC as a starting point to estimate the discount rate to use in the net present value analysis of new projects (or of termination decisions). You may need to know the technique for application in some case study solutions. The project also develops student skills in using elementary financial management models, in dealing with situations where there are too much or too little data, in employing publicly available data sources with little guidance, and in applying sound judgment when encountering naturally occurring measurement errors.
1. A bank is an institution that deals in money and credit, accepts deposits from the people and advances loans to its customers. (a) / (b)
2. Accepting of deposits and advancing loans are considered as the secondary functions of a bank. (a) / (b)
3. A statement of assets and liabilities at a particular time is called a balance sheet. (a) / (b)
4. Accepting utility bills and transfer of funds are considered as the primary functions of the commercial banks. (a) / (b)
5. The liabilities are that items on account of the bank where the bank pays to others. (a) / (b)
6. Reserve Fund is a part of accumulated profit which does not belong to shareholders. (a) / (b)
7. The primary deposits are the funds that customer put cash in his account as credit. (a) / (b)
8. The cash reserve ratio is a percentage of the primary deposits which is kept in cash by the bank for the withdrawal of customers. (a) /(b)
9. When a loan is advanced by a commercial bank it is called creation of money. (a) / (b)
10. Discounting the bills of exchange is a type of advancing loans and it creates money. (a) / (b)
11. The current accounts are also called demand deposits as the bank needs to pay demand. (a) / (b)
12. The bank pays interest on the current account or demand deposits to the customers. (a) / (b)
13. The Fixed Deposit Account is also called Time Deposit. (a) / (b)
14. When a loan is paid off to a ban is called destruction of money. (a) / (b)
15. A letter of credit is written promise by a bank to make a loan if certain conditions are met. (a) / (b)
16. Adam Smith presented a theory of international trade is called Comparative Cost Theory. (a) / (b)
17. The relationship between value of aggregate exports and imports is called Balance of Trade. (a) / (b)
18. The “Maturity Date” of a security is a future date on which face value has to be repaid. (a) / (b)
19. The difference between money market and capital market is based on time factor. (a) / (b)
20. The IMF and World Bank both came into existence as a result of Bretons Wood Conference in 1944. (a) / (b)
Components Manufacturing Corporation (CMC) has 1 million shares of stock outstanding. CMC has a target capital structure with 60% equity and 40% debt. The company projects net income of $5 million and investment projects requiring $6 million in the upcoming year.
a. CMC uses the residual distribution model and pays all distributions in the form of dividends. What is the projected DPS?
b. What is the projected payout ratio?
In a minimum of 200-250 words respond to the following.
Wernicke' s and Broca' s research on speech perception was groundbreaking for understanding speech recognition. However, many are left believing that speech perception is localized to the left side of the brain only. Understanding lateralization and symmetry in the brain are important when discussing split brain patients. How might both hemispheres be involved in the hearing process?
Determine at which level of management (i.e., top management, middle management, or first-level supervision) the following decisions should be made.
For each, share your reasons and the factors you considered in making the decision.
Determining the size of dividends to be paid to shareholders
Deciding whether to approve an employee' s request for vacation time
Selecting the insurance company to provide dental insurance to employees
Approving an employee' s request to attend a local job-related seminar
Selecting the location for a new manufacturing facility in another state
Assisting a franchisee in determining the location for a Dunkin' Donuts store in the business district of a medium-sized city
Disciplining an employee who has been late for the third day in a row
Selecting the publications in which to run an advertisement for a retail store' s Memorial Day sale
Determining whether the company should begin random drug testing of all employees
Be sure to format your response in APA and provide two APA formatted references.
due Thursday 09/10 at 8:00 am
assignment:
watch two episodes of the show restaurant start up. review the questions and concerns asked by the investors of each prospective operator.
what kinds of questions did the investors ask? were the operators prepared?
which company would you invest in and why?
how does the knowledge of these operators compare to the knowledge of those in restaurant impossible?
Two-page paper, double spaced
nicely hand written!