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WA9

The document provides details of a weekly assignment for a business finance course. It includes 4 questions related to calculating costs of debt, equity, and weighted average cost of capital (WACC) for a company. The first question asks how various factors would impact rd, rs, and WACC and requires justifying the impacts. The second question provides a company's balance sheet and asks to calculate its market value capital structure. The third asks to calculate the after-tax cost of debt for a bond issue. The fourth asks to calculate costs of preferred and common equity.

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199 views

WA9

The document provides details of a weekly assignment for a business finance course. It includes 4 questions related to calculating costs of debt, equity, and weighted average cost of capital (WACC) for a company. The first question asks how various factors would impact rd, rs, and WACC and requires justifying the impacts. The second question provides a company's balance sheet and asks to calculate its market value capital structure. The third asks to calculate the after-tax cost of debt for a bond issue. The fourth asks to calculate costs of preferred and common equity.

Uploaded by

Bdbd
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Business Finance-1 (FIN506)

Weekly Assignment # 9

Instructor: Sana Tauseef


Semester: Fall 2019
Due Date: November 10, 11 p.m.

1. How would each of the factors in the following table affect a firm's cost of debt,
rd (1-T); its cost of equity, rs; and its weighted average cost of capital, WACC?
Indicate by a plus (+), a minus (-), or a zero (0) if the factor would increase, reduce,
or have an indeterminate effect on the item in question. Assume that all other
factors are held constant. Justify your answer after completing the table, but
recognize that several of the parts probably have no single correct answer. These
questions are designed to stimulate thought and discussion.

Effect on rd(1 - T) rs WACC


The corporate tax rate is lowered
The firm uses more debt
The firm doubles the amount of capital it raises
during the year
The firm expands into a risky new area
Investors become more risk averse
(12-15 lines)

2. Suppose the Schoof Company has this book value balance sheet:

Current assets $30,000,000 Current liabilities $20,000,000


Fixed assets 70,000,000 Long-term debt 30,000,000
Notes Payable $10,000,000
Common stock (1 million shares) 1,000,000
Retained earnings 39,000,000
Total assets $100,000,000 Total liabilities and equity $100,000,000

The notes payable are to banks, and the interest rate on this debt is 10%, the same
as the rate on new bank loans. These bank loans are not used for seasonal
financing but instead, are part of the company's permanent capital structure. The
long-term debt consists of 30,000 bonds, each with a par value of $1,000, an
annual coupon interest rate of 6%, and a 20-year maturity. The going rate of
interest on new long-term debt is 10%, and this is the present yield to maturity on
the bonds. The common stock sells at a price of $60 per share. Calculate the firm's
market value capital structure.

3. Suppose we have a bond issue currently outstanding that has 20 years left to
maturity. The coupon rate is 11% with annual payments. The bond is currently
selling for $950. If the par value is $1000 per bond and the tax rate is 40%,
calculate the after-tax cost of debt?

4. Your company has an outstanding preferred equity that has an annual dividend of
$10.5. If the preferred stock is selling for $100, and each new share issued will
carry a floatation cost of $4, calculate the cost of preferred equity?
Suppose that your company is expected to pay a common dividend of $1.50 per
share next year. There has been a steady growth in dividends of 7% per year and
the market expects that to continue. The current price is $30 and the floatation cost
is $3 per common share. What is the cost of common equity (retained earnings
and new common shares)?

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