Answer the following questions and put calculations 20. The cost of capital is u

Question

Answer the following questions and put calculations

20. The cost of capital is used primarily in

a)negotiations with banks because it reflects the company's overall borrowing power

b)setting the firm's basic risk level

c)capital budgeting because it reflects what the firm pays for the money it invests

d)negotiations with investment bankers because it establishes an overall return on which the market can base prices for the firm's securities

6. SMK Broadcasting is thinking about increasing its current dividend from $1.00 to either $1.07 (a seven percent growth rate) or $1.10 (a ten percent growth rate). Once it adopts the change, SMK wants to maintain the same dividend growth rate for the foreseeable future. Hence, the required return with the higher growth rate is 16%, while the required return with the lower growth rate is 13%. Which dividend adjustment will result in a higher price for SMK Broadcasting's common stock?

25. The following information pertains to the capital structure of a firm: (Problem 8)

Debt: One thousand bonds with a face value of $1,000 and a 10-year term were issued three years ago with a coupon rate of 10%. Today the bonds are selling to yield 10%.

Preferred stock: Ten thousand shares of preferred stock are outstanding with a $9 annual dividend and a $100 face value. Today the shares are selling to yield a 9% return.

Common equity: 100 thousand shares of common stock are outstanding at a current market price of $30 per share.

Develop the firm's market-value based capital structure.

Explanation / Answer

20.The cost of capital is used primarily for capital budgeting decisions for discounting the cashflows in future as it is the rate which reflects what firm pays for the money it invest. hence the correct answer is C.

6. Value= D1/(Re-g)

High growth:

Value= 1.10/(0.16-0.10)= $18.33

Low growth:

Value= 1.07/(0.13-.07)= $17.83

High growth rate reveals (dividend 1.10) High share price.

25. Market value of debt : since coupan rate and the ytm are same i.e., 10% , therefore Bond trades at par i.e., $1000 , Market value of debt=1000*1000= $1000000

Market value of Preference Share Capital= par valuei.e., 10000*100= $1000000 as the dividend rate and the yeild is same i.e., 9%

Market value of Equity Shares= 100000*30= $3000000

Capital Structure:

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