FINANCE-Yield of this bond can be calculated in Excel as =RATE (10,-105,1124,-1000).

QUESTION

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(a)
Yield of this bond can be calculated in Excel
as =RATE (10,-105,1124,-1000). This is equal to 8.60%.
Cost of capital = bond
yield *(1-tax rate) = 8.60%*(1-34%) =5.67%

(b) m(p)=
d(1+g)/ r-g
m(p)=27.58
d=1.75
g=7.5%
27.58 = 1.75 (1+7.5%)/(r-7.5%)

r= 7.56% Wrong: 14.32
C. Cost of Common equity ?
D. Bond selling to yield 12.8 percent where the firms tax
rate is 34 percent?

3.
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Firm’s cost of preferred stock = 2.74/35.06
Firm’s
cost of preferred stock = 7.81%WRONG

The flotation costs adjusted initial outlay
for issuing the preferred shares are $______ (Round to the nearest dollars
Flotation costs adjusted initial outlay =
2.74*473000
Flotation
costs adjusted initial outlay = 1296020
How should this cost be incorporated into the
NPV of the project being financed?
We can account for flotation costs when
calculating NPV by adjusting the project’s discount rate

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Nper = 15*2 = 30 (indicates the number of
times the interest payment is made)
FV = 1000 (indicates the face value of bonds)
PV = 947 (indicates the present value of
bonds)
PMT = 1000*13.8%*1/2 = 69 (indicates
semi-annual interest payment)
Rate = ? (indicates the cost of debt)
After Tax Cost of Capital for Bonds= Rate (Nper,PMT,PV,FV)*2*(1-Tax Rate) =
Rate(30,69,-947,1000)*2*(1-34%) =10%
Answer is10%.WRONG

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Calculation of weights of the component
Total value of the firm capital structure =
Value of bonds + Value of preferred stock + Value of common stock
= 480000+140000+450000
=1070000
Weight of bond = Value of bond / Total value
of firm
= 480000/1070000 i.e 44.85%
Weight of preferred stock = Value of preferred
stock / Total value of firm
= 140000/1070000 i.e 13.08%
Weight of common stock = Value of common stock
/ Total value of firm
= 450000/1070000 i.e 42.05%
Calculation of cost of capital
After tax cost of debt = 8.1(1-Tax)
= 8.1( 1-0.34) i.e 5.346WRONG
After tax cost of preferred stock = Preference
dividend ( 1-Tax)
= 7.50(1-0.34) i.e. 4.95 WRONG
Price of common stock = D1/Ke-G
44.85 = 4.06(1+0.044)/Ke-0.044
49.31 = 4.24/Ke-0.044
49.31Ke – 2.16964 = 4.24
Ke = 6.41/49.31 i.e 13%?
WACC =( Weight of debt * Cost of debt)+
(Weight of [preferred stock * Cost of preferred stock) + ( Weight of common
stock * Cost of common stock)
= (0.5047*5.148)+(0.1028*4.95)+(0.3925*13)
= (2.60+0.509+5.10)
= 8.209%?

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a. If sales increase by 20% means increase of
$9156200, consider variable costs also increase with increasing sales by 20%
Thus revenue before fixed cost increase by 20%
to 27588000, thus EBIT is $36854000. Net Income increase by $17725500. EBIT
increase is 41.72% and net income increase is 46.27%WRONG

b. Similarly for second part

EBIT decrease is 41.72% and net income
decrease by 46.27%

c. If firm reduces debt financing, interest
rates cut into half, there will be no effect on EBIT, but net income would
increase by 0.5*(1350000/2) = $337500 after tax
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Return

Probability

Expected return

Deviation

Square Deviation

Rapid

100

5

5

81

65.61

3.2805

Modest

30

50

15

11

1.21

0.605

Continue recession

10

40

4

-9

0.81

0.324

Falls into depression

-100

5

-5

-119

141.61

7.0805

Expected
Return

19

Standard
Deviation

11.29

a)
Expected return is 19
b)
Standard deviation is 11.29 WRONG
c)
Standard deviation is less than expected return.
So it is safe to go into the investment

ANSWER:

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