24 Jul HOW MUCH MUST YOU PUT INTO THAT FUND TODAY IF THE FUND WILL EARN 10 PERCENT IN EACH OF THE 10 YEARS?
a. Alpha Products intends to maintain its capital structure of 40 percent debt and 60 percent common Show more a. Alpha Products intends to maintain its capital structure of 40 percent debt and 60 percent common equity in it new capital budget. To finance its capital budget for next year the firm will sell $50 million of 11 percent debentures at par and finance the balance of its $125 million capital budget with a new seasoned offering of equity. Next year Alpha expects net income to grow 7 percent to $140 million and dividends also are expected to increase 7 percent to $1.40 per share (next year) and to continue growing at that rate for the foreseeable future. The current market value of Alphas stock is $30. If the firm has a marginal tax rate of 40 percent what is its weighted cost of capital for the coming year? 1. What would be the weighted average cost of capital for Limp Linguini Noodle Makers Inc. under the following conditions: *The capital structure is 40% debt and 60% equity: *The before-tax cost of debt is 20% and the firm is in the 40% tax bracket. : *The firms beta is 1.7 : *The risk-free rate is 7% and the market risk premium is 6% *Floatation costs for equity is 10%. 2.Calculate the after-tax cost of preferred stock for Tennessee Valley Power Company which is planning to sell $150 million of $4.25 cumulative preferred stock to the public at a price of $28 per share. Flotation costs are 11%. Tennessee Valley has a marginal income tax rate of 40%. 7.Two-years ago Trans-Atlantic Airlines sold a $250 million bond issue to finance the purchase of new jet airliners. These bonds were issued in $1000 denominations with an original maturity of 12 years and a coupon rate of 12%. They pay interest on a semi-annual basis. Determine the value today of one of these bonds to an investor who requires a 14% rate of return on these securities. 39. Wilshire Companys earnings and common stock dividends have been growing at an annual rate of 4 percent over the past several years. The firm currently (t = 0) pays an annual dividend of $4.00. Assuming that Wilshires common stock dividends continue growing at the past rate for the foreseeable future determine the value of the companys common stock to an investor who requires a 13 percent rate of return on these securities. 10. If the stock of Sun Computers is selling for $34 and the current dividend is $0.48 what is the implied constant growth rate of dividends to an investor who requires a 14% rate of return? 8. IOU a technology firm issued a 10% coupon 20 year to maturity first mortgage bond five years ago. If the current market rate of debt for IOU is 6% at what price should this bond sell to the nearest dollar? Assume a par value of $1000 and pays interest semi-annually. 12. In six years your daughter will be going to college. You wish to have a fund that will provide her $10000 per year (end of year) for each of her four years in college. How much must you put into that fund today if the fund will earn 10 percent in each of the 10 years? Show less
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