1) A company has target values of debt, preferred and common of $23MM, $16MM and

Question

1)            A company has target values of debt, preferred and common of $23MM, $16MM and $85MM. It has book values of debt, preferred and common of $66MM, $7MM and $18MM. It also has liquidation values of debt, preferred and common of $38MM, $19MM and $6MM. What weights should it use for purposes of estimating WACC?

                a.           

Debt 60.3%; Preferred 30.2%; Common 9.5%

                b.           

Debt 18.6%; Preferred 12.9%; Common 68.5%

                c.            

Debt 23.4%; Preferred 46.2%; Common 31.4%

                d.           

Debt 72.5%; Preferred 7.7%; Common 19.8%

2)            Quantix Corp has shares with a beta of 1.3. The risk free rate is 3% and the expected market return is 9%. Its tax rate is 30%. The company's shares currently trade for $45 a share. What is the company's estimated cost of retained earnings?

3)         · A company has target weights of debt, preferred and common equity of 20%, 10% and 70%, respectively. It has liquidation values of debt, preferred and common equity of 30%, 15% and 55%. Its book values of debt, preferred and common equity are 40%, 10% and 50%. The estimated costs, net of adjustments, to the issuer are 5%, 7% and 11% for debt, preferred and common equity. Estimate the firm's weighted average cost of capital.

4)         · Deltona issued preferred shares four years ago at $60 per share, with a promised dividend of $5 per share. The company's tax rate is 35%, and its common stock beta is 0.80. Yields on comparable risk preferred stocks are 10%. The floatation expense percentage is 10. What is the cost to Deltona to issue preferred shares under current market conditions? Express your answer as a percentage, and round to two decimal points.

5)         · Yield to maturity (YTM) on debt issues with risk comparable to the Sonar Company is currently 10.6%. Sonar has issued debt two years ago with a YTM of 8.00%. Sonar's common stock beta is 1.15, and its tax rate is 28. The appropriate rate for Sonar to use for debt in estimating its WACC is what rate? Show your answer as a percentage, rounded to two decimal places.

6)         · A company expects to earn $24 million in income this coming year. Its target capital structure is 30% debt, 15% preferred stock, and 55% common equity financing. The company normally pays a dividend equal to 30% of its earnings. At what point will its WACC move from one level to the next, based upon the need to issue new common shares, assuming it adheres to its target capital structure? At what total capital investment level? Show your answer in millions of dollars with one decimal point ($34,000,000 you would record as 34.0)

Explanation / Answer

1)            A company has target values of debt, preferred and common of $23MM, $16MM and $85MM. It has book values of debt, preferred and common of $66MM, $7MM and $18MM. It also has liquidation values of debt, preferred and common of $38MM, $19MM and $6MM. What weights should it use for purposes of estimating WACC?

Option b. Debt 18.6%; Preferred 12.9%; Common 68.5%

Note: WACC should be estimated using target capital structure, which is the capital structure the company’s management intends to maintain in the long-run. For practical purposes, market values are usually used and where the market values are not available, book values may be used to find out the weight.

here, the Target values for debt, preferred and common of $23MM, $16MM and $85MM = total capital of $124MM
for debt = 23 / 124 * 100 = 18.6%
for Preferred = 16 / 124 * 100 = 12.9% and
for common stock = 85 / 124 * 100 = 68.5%

2)            Quantix Corp has shares with a beta of 1.3. The risk free rate is 3% and the expected market return is 9%. Its tax rate is 30%. The company's shares currently trade for $45 a share. What is the company's estimated cost of retained earnings?

Cost of retained earnings can be calculated based on  Capital-asset-pricing-model (CAPM) approach

here, the formula is, Cost of retained earnings = Rf + beta ( Rm - Rf)

= 3% + 1.3(9%-3%)

=3%+ 1.3* 6 % = 3% + 7.8% = 10.8%

3)         · A company has target weights of debt, preferred and common equity of 20%, 10% and 70%, respectively. It has liquidation values of debt, preferred and common equity of 30%, 15% and 55%. Its book values of debt, preferred and common equity are 40%, 10% and 50%. The estimated costs, net of adjustments, to the issuer are 5%, 7% and 11% for debt, preferred and common equity. Estimate the firm's weighted average cost of capital.

weighted average cost of capital = sum of weights(only target weights need to consider) * estimated cost

Therefore, weighted average cost of capital= 0.087 * 100 = 8.7%

4)         · Deltona issued preferred shares four years ago at $60 per share, with a promised dividend of $5 per share. The company's tax rate is 35%, and its common stock beta is 0.80. Yields on comparable risk preferred stocks are 10%. The floatation expense percentage is 10. What is the cost to Deltona to issue preferred shares under current market conditions? Express your answer as a percentage, and round to two decimal points.

Cost of preference share (Kp)) = Annual dividend / Net proceeds after floatation costs

here, Annual dividend (given directly) = $5per share and

Net proceeds after floatation costs = paid 60 - floating expenses 10% = 60 - 10% = $54

Cost of preference share = 5 / 54 = 0.09259

= 9.23%

Calculation Figure for debt = 20% * 5% = 0.2 * 5% = 0.01 0.01 For preferred = 10% * 7% = 0.1 * 7% =0.007 0.007 For common stock = 70% * 10% = 0.7 *10% = 0.07 0.07 weighted average cost of capital 0.087

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