Chapter 9 p382 P9-1, P9-5, P9-7, P9-10, P9-14 P9-1: Concepts of cost of capital: Mace Manufacturing is in the process of analyzing its investment decision maing procedures! "#o "#o pro$ects evaluated %y the &rm recently involved %uilding ne# facilities in di'erent regions( )orth and *outh! "he %asic varia%les surrounding each pro$ect analysis and the resulting decision actions are summarized in the follo#ing ta%le! Basic variables cost life epected return least-cost &nancing source cost post ta2 decision action reason
North + million 15 years ./
South +5 million 15 years 15/
7/ de%t 7/
euity 15/
invest ./7/ cost
don3t invest 1/61/ cost
! n analyst analyst evaluating the )orth )orth facility facility epects epects that the pro$ect #ill %e &nanced %y de%t that costs the &rm 7/! 8hat recommendations do you thin this th is analyst #ill mae regarding the investment :! nother analyst analyst assigned assigned to study the *outh facility %elieves %elieves that funding for the pro$ect #ill come from the &rm;s retained earnings at a cost of 1/! 8hat recommendation do you epect this analyst a nalyst to mae regarding the investment
=plain #hy the decision in part and : may not %e in the %est interest of the &rm;s investors )orth is ./ 7/ and *outh is 1/61/
>! ?f the &rm maintains a capital structure containing 40/ de%t and 0/ euity, &nd its #eighted average cost using the data in the ta%le! =! ?f %oth analysts analysts had used used the #eighted #eighted average average cost calculated in part >, #hat recommendations #ould they
recommendations #ould they have made regarding the )orth and *outh facilities @!
P9-5 the cost of debt: Aronseth >ry#all *ystems, ?nc! is in discussions #ith its investment %aners regarding the issuance of the %onds! "he investment %aner has informed the &rm that di'erent maturities #ill carry di'erent coupon rates and sell at di'erent prices! "he &rm must choose among several alternatives! ?n each case, the %onds #ill have a +1000!00 par value and Boatation costs #ill %e +C0 per %ond! "he company is taed at a rate of 40/!
Coupo n rate
A B C D
9% 7% 6% 5%
Time to maturity (years) 16 5 7 10
Premium or discount $250.00 50 PAR -75
! :! !
P9- Cost of preferred stoc!: "aylor *ystems has $ust issued preferred stoc! "he stoc has 1/ annual dividend and a +100 par value and #as sold at +95!50 per share! ?n addition, Boatation costs of +!50 per share must %e paid! !
A
rp=
$95.00
=
12.63%
:! ?f the &rm sells the preferred stoc #ith a 10/ annual dividend and nets +90!00 after Boatation costs, #hat is its cost B
rp=
$10.00 $90.00
=
11.11%
P9-1" Cost of co##on stoc! e$uit%: !n&'1() *Nn Eoss tetiles #ish to measure its cost of common stoc euity! "he &rm;s stoc is currently for +57!50! "he &rm epects to pay a +C!40 dividend at the end of the year 012! "he dividends for the past 5 years are sho#n in the follo#ing ta%leD +ear 015 014 01C 01 011
'ivide nd +C!10 +!9 +!0 +!C0 +!1
fter underpricing and Botation costs, the &rm epects to net +5 per share on a ne# issue! ! >etermine the gro#th rate of dividends from 011-015 )F4 011-0152 PG initial value2 F -+!1 @G terminal value2 F +C!10 solve for ? gro#th rate2 F9!97/ :! >etermine the net precedes )n that the &rm #ill actually receive! )nF+
C!40I57!502 J0!0997 0!0591 J 0!0997F 0!15..
F15!../
>! Hsing constant gro#th valuation model, determine the cost of ne# common stoc, En! C!40 I +5!002 J 0!0997 0!054 J 0!0997F 0!151
F1!51/
P9-14 8<
:oo value +4,000,000 40,000
Maret value +C,.40,000 0,000
fter-ta cost !00/ 1C
1,00,000 5,100,000
C,000,000 ,900,000
17
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