8:55 PM @23%. .11 T-Mobile Meme 25.(10 points) The balance shect of Balcom Indus
ID: 2798192 • Letter: 8
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8:55 PM @23%. .11 T-Mobile Meme 25.(10 points) The balance shect of Balcom Industries is shown below: Current Assets Fixed Assets Total Assets 8,000,000 12000.000 Accounts Payable Long Term Debt Common Stock 3,000,000 5,000,000 1,000,000 shares@ $4 par 4,000,000 002.000 Retained Earmings Balcom management plans to maintain the existing capital structure based on market values Balcom's bonds have a 9% annual coupon rate (paid senn annually. face value of $1,000, nd 12 years to maturity. The bonds are currently selling for $1,200 each. Thus, the markct vals.of the firm's long term debt is $6.000.000 Balcom common stock currently sells for $30 per share Balcom paid a dividend yesterday of $4.00 per share and a constant rate of 5% per year. Balcom's marginal tax rate is 34%. expects the dividend per share to grow Calculate the market value of the company's equity a. b. Calculate the appropriate weights to be used in determining the firm's cost of capital Calculate the after-tax cost of new debt. c. d. Calculate the cost of retained carnings. o00Explanation / Answer
c
cost of debt
interest+(face value-market value)/years to maturity / (face value+ market value)/2
90+(1000-1200)/12 / (1000+1200)/2
73.333/1100
6.67%
after tax cost of debt
before tax cost of debt*(1-tax rate)
6.67*(1-.34)
4.4022
a
market value of common stock
1000000*30
30000000
market value of debt
6000000
b
source
value
weight
debt
6000000
0.166667
equity
30000000
0.833333
total
36000000
d-
cost of equity
(expected dividend/market price)+growth rate
(4.2/30)+.05
19.00%
expected dividend
4*(1.05)
4.2
market price
30
growth rate
5%
cost of retained earning
it is equal to cost of equity
19%
c
cost of debt
interest+(face value-market value)/years to maturity / (face value+ market value)/2
90+(1000-1200)/12 / (1000+1200)/2
73.333/1100
6.67%
after tax cost of debt
before tax cost of debt*(1-tax rate)
6.67*(1-.34)
4.4022
a
market value of common stock
1000000*30
30000000
market value of debt
6000000
b
source
value
weight
debt
6000000
0.166667
equity
30000000
0.833333
total
36000000
d-
cost of equity
(expected dividend/market price)+growth rate
(4.2/30)+.05
19.00%
expected dividend
4*(1.05)
4.2
market price
30
growth rate
5%
cost of retained earning
it is equal to cost of equity
19%
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