The target capital structure for QM Industries is 45% common stock, 11% preferred stock, and 44% debt Custom Essay

1) The target capital structure for QM Industries is 45% common stock, 11% preferred stock, and 44% debt. If the cost of common equity for the firm is 17.3%, the cost of preferred stock is 9.8%, the before-tax cost of debt is 7.8%, and the firm’s tax rate is 35%, what is QM’s weighted average cost of capital? __%$
Just fill in the yellow cells. Don’t mess with the greens as those formulate the answers.
WACC

Capital
Common Stock
Preferrred Stock
Debt

2) Crypton electronics has a capital structure consisting of 36% common stock and 64% debt. A debt issue of $1,000 par value, 6.3% bonds that mature in 15 years and pay annual interest will sell $971. Common stock of the firm is currently selling for $30.73 per share and the firm expects to pay $2.27 dividend next year. Dividends have grown at the rate of 4.8% per year and are expected to continue to do so for the foreseeable future. What is the Crypton’s cost of capital where the firm’s tax rate is 30%?
round to 3 decimal points
WACC

Capital
Common Stock
Debt
Par value
bonds that mature
years
will sell for

3) The target capital structure for Jowers Manufacturing is 50 percent common stock, 15 percent preferred stock, and 35 percent debt. If the cost of equity for the firm is 20 percent, the cost of preferred stock is 12 percent, and the before-tax cost of debt is 10 percent, what is Jower’s cost of capital? The firm’s marginal tax rate is 34 percent.

WACC

Capital
Common Stock
Preferrred Stock
Debt

4) As a member of the finance department of Ranch Manufacturing, my supervisor has asked me to compute the appropriate discount rate to use when evaluating the purchase of new packaging equipment for the plant. Under the assumption that the firm’s present capital structure reflects the appropriate mix of capital sources for the firm, I have determined the market value of the firms capital structure as follows:
Source of Capital Market Values
bonds $3,700,000
preferred stock 1,500,000
common stock 5,600,000

To finance the purchase, the company will sell 10-year bonds paying 7.2% per year at the market price of $1,049. Preferred stock paying $2.01 dividend can be sold for $24.58. Common stock for the company is currently selling for $55.27 per share and the firm paid a $3.05 dividend last year. Dividends are expected to continue growing at a rate of 5.4% per year indefinately. If the firms tax rate is 30%, what discount rate should I use to evaluate the equipment purchase ?

Bonds
Preferred Stock
Common Stock

PV
PMT
FV
Periods
Rate
Get Rate

WAAC
#DIV/0!

5) Abe Forrester and three of his friends from college have interested a group of venture capitalists in backing their business idea. The proposed operation would consist of a series of retail outlets to distribute and service a full line of vacuum cleaners and accessories. These stores would be located in Dallas, Houston, and San Antonio. To finance the new venture two plans have been proposed: Plan A is an all common equity structure in $2.2 million dollars would be raised by selling 86,000 shares of common stock. Plan B would involve issuing $1.1 million dollars in long-term bonds with an effective interest rate of 11.7% plus $1.1 million would be raised by selling 43,000 shares of common stock. The debt funds raised under Plan B have no fixed maturity date, in that this amount of financial leverage is considered a permanent part of the firm’s capital structure. Abe and his partners plan to use a 38% tax rate in their analysis, and they have hired you on a consulting basis to do the following; A. Find the EBIT indifference level associated with the two financing plans. B. Prepare a pro forma income statement for the EBIT level solved for in Part a. that shows that EPS will be the same regardless whether Plan A or B is chosen. a. find the EBIT indifference level associated with the two financing plans. The EBIT indifference level associated with the two financing plans is $? Round to the nearest dollar
A. Find the EBIT indifference level associated with the two financing plans.

Plan A
Common Equity Structure raised $

stocks needed to raise money

B)
EBIT
Less interest expense
earnings before taxes
Less Taxes
Net Income
Number of common shares
EPS

B Part 2
EBIT
Less interest Expense
earnings before taxes
Less Taxes
Net Income
Number of common shares
EPS

6) Three recent graduates of the computer science program at the University of Tennessee are forming a company that will write and distribute new application software for the iPhone. Initially, the corporation will operate in the southern region of Tennessee, Georgia, North Carolina, and South Carolina. A small group of private investors in the Atlanta, Georgia area is interested in financing the startup company and two financing plans have been put forth for consideration: The first (Plan A) is an all-common-equity capital structure. $2.1 million dollars would be raised by selling common stock at $20 per common share. Plan B would involve the use of financial leverage. $1.4 million dollars would be raised by selling bonds with an effective interest rate of 10.6% (per annum), and the remaining $0.7 million would be raised by selling common stock at the $20 price per share. The use of financial leverage is considered to be a permanent part of the firm’s capitalization, so no fixed maturity date is needed for the analysis. A 34% tax rate is deemed appropriate for the analysis. a. Find the EBIT indifference level associated with the two financing plans. (Round the nearest dollar.) b. A detailed financial analysis of the firm’s prospects suggests that the long-term EBIT will be above $341,000 annually. Taking this into consideration, which plan will generate the higher EPS? (Round income statement amounts to the nearest dollar except the EPS to the nearest cent.)

Plan A
Common Equity Structure raised $

Price per share

B)
EBIT
Less interest expense
earnings before taxes
Less Taxes
Net Income
Number of common shares
EPS

B Part 2
EBIT
Less interest Expense
earnings before taxes
Less Taxes
Net Income
Number of common shares
EPS

The Plan that will Generate Higher EPS is (pick the greater one between both)
A
B