Part 2: Assuming no new common stock will be issued to the public so all new common equity will be internally generated, calculate effective costs and the weighted average cost of capital for the firm based on the current capital structure, which is assumed to be optimal. 6. What is the Effective Cost of the 4.25% Senior Debentures? a. 2.26% b. 2.81% c. 4.28% d 4.44% e. 5.25% 7. What is the Effective Cost of the 6.85% Senior Debentures? a. 2.49% b. 4.86% c. 4.91% d. 5.02% e. 5.97% 8. What is the Effective Cost of the 7.05% Subordinated Debentures? a. 2.64% b. 5.21% c 5.32% d. 5.49% e. 6.11% 9. What is the Effective Cost of the 7.60% Preferred Stock? a. 7.51% b. 7.22% c 7.09% d. 6.75% e. 5.93% 10. What is the Effective Cost of the Internal Common Stock? a. 7.80% b. 7.68% c. 7.49% d. 7.01% e. 6.16% 1. A Cost of Capital Problem You collect the following information on the debt and equity components of Walkure Corporation's capital structure. The corporation believes it has an optimal capital structure and will use the current capital structure to calculate its cost of capital. Capital Structure Book Market Term to Current Par (face value) Components Value Value [In millions) [In millions] Maturity In Years Price Value 4.25% Senior Debentures $31.45 $29.72 6 $945.00 $1,000 6.85% Senior Debentures 102.72 110.94 16 $1080.00 $1,000 7.05% Subordinated Debentures 82.32 88.08 11 $1,051.00 $1,000 7.60% Preferred Stock 20.98 22.07 perpetual $26.30 $25 Common Equity Totals 190.00 $427.47 219.19 $32.75 $1 $470.00 The firm has a marginal income tax rate of 25% and flotation costs currently estimated at 1.5% on debt issues and 3.8% on equity issues. The company expects to pay a dividend of $1.04 per share on its common next year and growth is expected to be 4.5% annually in the future. Bonds coupons are semi-annual.
Part 2: Assuming no new common stock will be issued to the public so all new common equity will be internally generated, calculate effective costs and the weighted average cost of capital for the firm based on the current capital structure, which is assumed to be optimal. 6. What is the Effective Cost of the 4.25% Senior Debentures? a. 2.26% b. 2.81% c. 4.28% d 4.44% e. 5.25% 7. What is the Effective Cost of the 6.85% Senior Debentures? a. 2.49% b. 4.86% c. 4.91% d. 5.02% e. 5.97% 8. What is the Effective Cost of the 7.05% Subordinated Debentures? a. 2.64% b. 5.21% c 5.32% d. 5.49% e. 6.11% 9. What is the Effective Cost of the 7.60% Preferred Stock? a. 7.51% b. 7.22% c 7.09% d. 6.75% e. 5.93% 10. What is the Effective Cost of the Internal Common Stock? a. 7.80% b. 7.68% c. 7.49% d. 7.01% e. 6.16% 1. A Cost of Capital Problem You collect the following information on the debt and equity components of Walkure Corporation's capital structure. The corporation believes it has an optimal capital structure and will use the current capital structure to calculate its cost of capital. Capital Structure Book Market Term to Current Par (face value) Components Value Value [In millions) [In millions] Maturity In Years Price Value 4.25% Senior Debentures $31.45 $29.72 6 $945.00 $1,000 6.85% Senior Debentures 102.72 110.94 16 $1080.00 $1,000 7.05% Subordinated Debentures 82.32 88.08 11 $1,051.00 $1,000 7.60% Preferred Stock 20.98 22.07 perpetual $26.30 $25 Common Equity Totals 190.00 $427.47 219.19 $32.75 $1 $470.00 The firm has a marginal income tax rate of 25% and flotation costs currently estimated at 1.5% on debt issues and 3.8% on equity issues. The company expects to pay a dividend of $1.04 per share on its common next year and growth is expected to be 4.5% annually in the future. Bonds coupons are semi-annual.
Financial Reporting, Financial Statement Analysis and Valuation
8th Edition
ISBN:9781285190907
Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Chapter12: Valuation: Cash-flow Based Approaches
Section: Chapter Questions
Problem 12PC
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![Part 2: Assuming no new common stock will be issued
to the public so all new common equity will be
internally generated, calculate effective costs and the
weighted average cost of capital for the firm based on
the current capital structure, which is assumed to be
optimal. 6. What is the Effective Cost of the 4.25%
Senior Debentures? a. 2.26% b. 2.81% c. 4.28% d
4.44% e. 5.25% 7. What is the Effective Cost of the
6.85% Senior Debentures? a. 2.49% b. 4.86% c. 4.91%
d. 5.02% e. 5.97% 8. What is the Effective Cost of the
7.05% Subordinated Debentures? a. 2.64% b. 5.21% c
5.32% d. 5.49% e. 6.11% 9. What is the Effective
Cost of the 7.60% Preferred Stock? a. 7.51% b. 7.22% c
7.09% d. 6.75% e. 5.93% 10. What is the Effective
Cost of the Internal Common Stock? a. 7.80% b. 7.68%
c. 7.49% d. 7.01% e. 6.16%
1. A Cost of Capital Problem
You collect the following information on the debt and equity components of Walkure Corporation's capital structure. The corporation
believes it has an optimal capital structure and will use the current capital structure to calculate its cost of capital.
Capital Structure
Book
Market
Term to
Current
Par (face
value)
Components
Value
Value
[In millions)
[In millions]
Maturity
In Years
Price
Value
4.25% Senior Debentures
$31.45
$29.72
6
$945.00
$1,000
6.85% Senior Debentures
102.72
110.94
16
$1080.00 $1,000
7.05% Subordinated Debentures
82.32
88.08
11
$1,051.00 $1,000
7.60% Preferred Stock
20.98
22.07
perpetual
$26.30
$25
Common Equity
Totals
190.00
$427.47
219.19
$32.75
$1
$470.00
The firm has a marginal income tax rate of 25% and flotation costs currently estimated at 1.5% on debt issues and 3.8% on equity
issues. The company expects to pay a dividend of $1.04 per share on its common next year and growth is expected to be 4.5%
annually in the future. Bonds coupons are semi-annual.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fe3c108c0-2a64-439a-a5f9-01672b122b1b%2F8f669a92-d7a9-4fbd-a771-f66a719c0028%2F2dprznl_processed.png&w=3840&q=75)
Transcribed Image Text:Part 2: Assuming no new common stock will be issued
to the public so all new common equity will be
internally generated, calculate effective costs and the
weighted average cost of capital for the firm based on
the current capital structure, which is assumed to be
optimal. 6. What is the Effective Cost of the 4.25%
Senior Debentures? a. 2.26% b. 2.81% c. 4.28% d
4.44% e. 5.25% 7. What is the Effective Cost of the
6.85% Senior Debentures? a. 2.49% b. 4.86% c. 4.91%
d. 5.02% e. 5.97% 8. What is the Effective Cost of the
7.05% Subordinated Debentures? a. 2.64% b. 5.21% c
5.32% d. 5.49% e. 6.11% 9. What is the Effective
Cost of the 7.60% Preferred Stock? a. 7.51% b. 7.22% c
7.09% d. 6.75% e. 5.93% 10. What is the Effective
Cost of the Internal Common Stock? a. 7.80% b. 7.68%
c. 7.49% d. 7.01% e. 6.16%
1. A Cost of Capital Problem
You collect the following information on the debt and equity components of Walkure Corporation's capital structure. The corporation
believes it has an optimal capital structure and will use the current capital structure to calculate its cost of capital.
Capital Structure
Book
Market
Term to
Current
Par (face
value)
Components
Value
Value
[In millions)
[In millions]
Maturity
In Years
Price
Value
4.25% Senior Debentures
$31.45
$29.72
6
$945.00
$1,000
6.85% Senior Debentures
102.72
110.94
16
$1080.00 $1,000
7.05% Subordinated Debentures
82.32
88.08
11
$1,051.00 $1,000
7.60% Preferred Stock
20.98
22.07
perpetual
$26.30
$25
Common Equity
Totals
190.00
$427.47
219.19
$32.75
$1
$470.00
The firm has a marginal income tax rate of 25% and flotation costs currently estimated at 1.5% on debt issues and 3.8% on equity
issues. The company expects to pay a dividend of $1.04 per share on its common next year and growth is expected to be 4.5%
annually in the future. Bonds coupons are semi-annual.
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