With the below given information, how do I calculate 1) the interest payment on
ID: 2682959 • Letter: W
Question
With the below given information, how do I calculate 1) the interest payment on debt, 2) payment periods left on debt, 3) yield rate on debt, and 4) annual yield on the debt. I would like to have the steps to help me in the future with homework and exams.A B C D
INVESTMENT $30,000,000 $20,000,000 $25,000,000 $25,000,000
EXPECTED RETURN 10.00% 14.00% 11.50% 16.00%
The firms capital structure consists of: FMV
CAPITAL PERCENTAGE AMOUNT
DEBT 30% $15,000,000
PREFERRED STOCK 10% $5,000,000
COMMON STOCK 60% $30,000,000
$50,000,000
Other information about the firm:
CORPORATE TAX RATE 35%
DEBT
CURRENT PRICE $900.00
ANNUAL INTEREST 9.00% CURRENT INTERST PAID SEMIANNUALLY
ORIGINAL MATURITY 25 YEARS, BUT NOW 20 YEARS LEFT
MATURITY VALUE $1,000.00
FLOTATION COST INSIGNIFICANT
MARKET YIELD PROJECTED:
UP TO $20 MILLION 9%
ABOVE $20 MILLION 12% 3 % additional premium
PREFERRED
CURRENT PRICE $50.00
LAST DIVIDEND (D0) $5.00 FIXED AT 10% OF PAR
FLOTATION COST $2.00
NEXT DIVIDEND (D1) $5.00
COMMON
CURRENT PRICE $33.00
LAST DIVIDEND (D0) $1.50
RETAINED EARNINGS $16,000,000
GROWTH RATE (g) 9%
FLOTATION COST $3.00
NEXT DIVIDEND (D1) $1.635
Explanation / Answer
Current price
$ 900.00
Maturity value
$ 1,000.00
Interest payment
$ 45.00
Payment periods
40
Yield rate
5.090%
Annual yield
10.18%
Kd
6.62%
Kp
10.00%
Ke
13.95%
Current Cost of capital
11.36%
=================
Knp preferred stock
10.42%
New cost of capital
11.40%
==========================
If the capital structure increases more than
$ 26,666,667
=====================================
Kne common stock
14.45%
If you could not come up with the Kne returns do the cost of captial assuming Kd=7%, Knp=12%, and Ke=14%.
New cost of capital
12.33%
This will consider increased cost of debt in part F
===============================
Capital structure increase
$ 16,666,667
Level
Cost of Capital
Upto 66666667
11.40%
66666667 to 76666667
12.03%
Above 76666667
12.33%
Projects
Return
Amounts
Cumlative totals
D
16.00%
$ 25,000,000
$ 25,000,000
B
14.00%
$ 20,000,000
$ 45,000,000
C
11.50%
$ 25,000,000
$ 70,000,000
A
10.00%
$ 30,000,000
$ 100,000,000
====================
Projects A and C should be rejected because their return is less than cost of capital.
Projects D and B should be accepted because their return is greater than cost of capital.
=======================
FMV
CAPITAL
AMOUNT
Additions
New FMVs
Percentage
Debt
$ 15,000,000
$ 13,500,000
$ 27,150,000
28.12%
Preferred stock
$ 5,000,000
$ 4,500,000
$ 9,687,500
10.03%
Common stock
$ 30,000,000
$ 27,000,000
$ 59,700,000
61.84%
$ 50,000,000
$ 45,000,000
$ 96,537,500
100.00%
Its assumed that equity capital is issued at market price of $33, debt at face value of $1000 and preferred stock at market price of $50
Current price
$ 900.00
Maturity value
$ 1,000.00
Interest payment
$ 45.00
Payment periods
40
Yield rate
5.090%
Annual yield
10.18%
Kd
6.62%
Kp
10.00%
Ke
13.95%
Current Cost of capital
11.36%
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