Posted: May 12th, 2024

FIN370 Myfinancelab Week-4 2015 (Score: 100%)

Question-1
Templeton Extended Care Facilities Inc is considering the acquisition of
a chain of cemeteries for $400 million. since the primary asset of this
business is real estate, Templeton's management has determined that
they will be able to borrow the majority of the money needed to buy the
business. The current owners have no debt financing but Templeton plans
to borrow $300 million and invest only $100 million in equity in the
acquisition. What weights should Templeton use in computing the WACC for
this acquisition? Round to one decimal place.
The appropriate weight of debt Wd is
The appropriate weight of common equity Wcs is

Question-2
2). Compute the cost of capital for the firm for the following:
a). A bond that has a $1,000 par value (face value) and a contract or
coupon interest rate of 11.9%. Interest payments are $59.50 and are paid
semiannually. The bonds have a current market value of $1,129 and will
mature in 10 years. The form's marginal tax rate is 34% .
aa). The after-tax cost of debt is _% (round to two decimals places)
b). A new common stock issue that paid a $1.82 dividend last year. The
firm's dividends are expected to continue to grow at 7.2% per year
forever. The price of the firm's common stock is now $27.97.
bb). The cost of common equity is _% (round to two decimal places)
c). A preferred stock that sells for $136 pays a dividend of 9.1 percent and has a $100 par value.
cc). The cost of the preferred stock is _% (round to two decimal places)
d). A bond selling to yield 11.1% where the form's tax rate is 34%.
dd). After tax cost of debt is _% (round to two decimal places)

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Question-3
(Cost of Preferred Stock) The preferred stock of Gator Industries sells
for $35.49 and pays $2.75 per year in dividends. What is the cost of
preferred stock financing? If Gator were to issue 550,000 more preferred
shares just like the ones it currently has outstanding, it could sell
them for $35.49 a share but would incur flotation costs of $3.12 per
share. what are the flotation costs for issuing the preferred shares and
how should this cost be incorporated into the NPV of the project being
financed?

Question-4
(Cost of Debt) The Walgren Corporation is contemplating a new investment
to be finance using one-third from debt. The firm could sell new $1,000
par value bonds with a 15-year maturity at a price of $949 that carry a
coupon interest rate is 12.7 % that is paid semiannually, and the bonds
would mature in fifteen years. If the company is in a 34% tax bracket,
what is the after-tax cost of capital to Walgren for bonds?

Question-5
(Cost of Debt) Gillian Stationery Corporation needs to raise $600,000 to
improve its manufacturing plant. It has decided to issue a $1,000 par
value bond with a coupon rate of 8% with interest paid semiannually and a
10-year maturity. If the investors require a 10% rate of return:
a. Compute the market value of the bonds.
b. How many bonds will the firm have to issue to receive the needed funds?
c. What is the firm’s after-tax cost of debt if the firm’s tax rate is 34 percent?

Question-6
(Weighted average cost of capital) As a consultant to GBH Skiwear, you
have been asked to compute the appropriate discount rate to use in the
evaluation of the purchase of a new warehouse facility. You have
determined the market value of the firm’s current capital structure
(which the firm considers to be its target mix of financing sources) as
follows:
Source of Capital Market Value
Bonds $500,000
Preferred stock $110,000
Common stock $420,000
To finance the purchase, GBH will sell 20-year bonds with a $1,000 par
value paying 7.7% per year at the market price of $954. Preferred stock
paying a $2.45 dividend can be sold for $34.32. Common stock for GBH is
currently selling for $50.04 per share. The firm paid a $3.94 dividend
last year and expects dividends to continue growing at a rate of 34.1%
per year into the indefinite future. The firm’s marginal tax rate is
34%. What discount rate should you use to evaluate the warehouse
project?

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Question-7
Lowe’s Companies, Inc. (LOW) and its subsidiaries operate as a home
improvement retailer in the United States and Canada. As of February 1,
2008, it operated 1,534 stores in 50 states and Canada. The company’s
balance sheet for February 1, 2008, included the following sources of
financing:
In Thousands of Dollars Financial Structure
Liabilities
Current liabilities
Accounts payable ……………………….. $ 4,137,000
Short-term/current debt …………………. 1,104,000
Other current liabilities …………………. 2,510,000
Total current liabilities …………………. $ 7,751,000
Long-term debt ………………………… 5,576,000
Other long-term liabilities ……………… 670,000
Long-term liabilities ……………………. $ 6,246,000
Stockholder equity …………………….. $16,098,000
Total …………………………………… $30,095,000
a. Calculate the values of Lowe’s debt ratio and interest-bearing debt ratio.
b. If the market value of Lowe’s common equity is $35.86 billion and
Lowe’s has no excess cash, what is the firm’s debt-to-enterprise-value
ratio?

Question-8
(Computing interest tax savings) Dharma Supply has earnings before
interest and taxes (EBIT) of $527,000, interest expenses of $307,000 and
faces a corporate tax rate of 36 percent.
a. What is Dharma Supply's Net Income?
b. what would dharmas net income be if it didnt have any debt?
c. what are the firms interest tax savings?

Question-9
You have developed the following pro forma income statement for your
corporation. It represents the most recent years operations, which ended
yesterday. Your supervisor in the controllers office has just handed
you a memorandum asking for written responses to the following
questions:
a. If Sales Should increase by 30%, by what percent would earnings before interest and taxes and net income increase?
b. If sales should decrease by 30% by what percent would earnings before interest and taxes and net income decrease?
c. If the firm were to reduce its reliance on debt financing such that
interest expense were cut in half, how would this affect your answers to
parts A and B?

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Question-10
(Capital Asset Pricing Model) CSB, Inc has a beta of 0.765. If the
expected market return is 10.5 percent and the risk free rate is 3.5
percent, what is the appropriate expected return of CSB(using the CAPM)?

Question-11
(Capital Asset Pricing Model) The expected return for the general market
is 11.0 percent, and the risk premium in the market is 6.3%. Tasaco,
LBM, and Exxos have betas of 0.849, 0.621 and 0.578, respectively. What
are the corresponding required rates of return for the three securities?

Question-12
James Fromholtz is considering whether to invest in a newly formed
investment fund. The fund’s investment objective is to acquire home
mortgage securities at what it hopes will be bargain prices. The fund
sponsor has suggested to James that the fund’s performance will hinge on
how the national economy performs in the coming year. Specifically, he
suggested the following possible outcomes:
a. Based on these potential outcomes, what is your estimate of the expected rate of return from this investment opportunity?
b. Would you be interested in making such an investment? Note that you
lose all your money in one year if the economy collapses into the worst
state or you double your money if the economy enters into a rapid
expansion.
c. Would you be interested in making such an investment?

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