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Today is January 1, 2013. As of today, Everest International’s (EI) capital structure is comprised of common equity, preferred stock and long-term debt. Few days ago, EI raised $1,025,000 issuing long-term bond which matures in 10 years. It pays 8.5% semi-annual coupon to the bond holders and the face value of the bond is $1,100,000. Everest International is expected to pay $1.75 dividend next year and the common dividend will grow at an annual rate of 7% forever. Currently, EI’s common stock is trading for $34, there are 45,000 common shares. EI's beta is 2.12.It is considering starting a new project. If it starts the new project, it will issue new common equity and there will be an 11% flotation cost to issue new equity. Assume that the price of new common stock will be same as the current common share price. EI Just issued 15,000 preferred shares at $25 per share with a commitment to pay $1.85 dividend per year. The firm’s marginal tax rate is 35%. The market risk premium is 4.5% and the risk-free rate is 3.25%.

Today is January 1, 2013. As of today, Everest International’s (EI) capital structure is comprised of common equity, preferred stock and long-term debt. Few days ago, EI raised $1,025,000 issuing long-term bond which matures in 10 years. It pays 8.5% semi-annual coupon to the bond holders and the face value of the bond is $1,100,000. Everest International is expected to pay $1.75 dividend next year and the common dividend will grow at an annual rate of 7% forever. Currently, EI’s common stock is trading for $34, there are 45,000 common shares. EI's beta is 2.12.It is considering starting a new project. If it starts the new project, it will issue new common equity and there will be an 11% flotation cost to issue new equity. Assume that the price of new common stock will be same as the current common share price. EI Just issued 15,000 preferred shares at $25 per share with a commitment to pay $1.85 dividend per year. The firm’s marginal tax rate is 35%. The market risk premium is 4.5% and the risk-free rate is 3.25%.
 
a. What is the before tax cost of debt?
b. Calculate the after tax cost of debt.
c. What is the cost of preferred stock?
d. Calculate the cost of equity using discounted cash flow method.
e. As you know that EI is considering issuing new equity. If it issues new common equity, what will be the cost of new equity?
f. What is the cost of common equity using the CAPM approach?
g. What is the weighted average cost of capital? (Hint: use cost of equity you have computed using the CAPM as cost of equity).
 
TUTORIAL PREVIEW
a.
Before tax cost of debt:
Nper = 10 x 2 =
20
PMT = 1100000x8.5%x1/2=
46750
PV =
-1025000
FV =
1,100,000
 
File name: Everest Internationals.xls  File type: doc PRICE: $12

Zheng Sen's chinese take out had earnings before interest and taxes of 4,000,000 last year. The firm has a marginal tax rate of 40% and currently has the following capital structure:

Zheng Sen's chinese take out had earnings before interest and taxes of 4,000,000 last year. The firm has a marginal tax rate of 40% and currently has the following capital structure:
 
Long term debt at 12% with an amount of 8,000,000 and total capital percentage of 25%
Preferred stock at 14% with an amount of 800,000 and total capital percentage of 25%
Common stock equity
2000000 shares outstanding for an amount of 16,000,000 and tot cap percentage of 50
 
Questions:
a. Calculate the firm's after tax ROE and EPS.
b. If the firm retires 4,000,000 of preferred stock using the proceeds from an equal increase in long term debt, what would have been the after tax ROE and EPS?
c. If the firm retires 4,000,000 of preferred stock using the proceeds from the sale of 500,000 shares of common stock, what would have been the after tax ROE and EPS?


TUTORIAL PREVIEW
a. Calculate the firm's after tax ROE and EPS.

Amount
Earnings befor interest and taxes
4,000,000
Less Interest (8,000,000 x 12%)
-960000
Earnings before taxes
3,040,000
Less Taxes (40%)
-1216000


File name: Zheng Sen's chinese.xls  File type: doc PRICE: $9

P03-03 Almway Corporation - Excel template

P03-03 Almway Corporation

 
                                                    ALMWAY CORPORATION
                                                      Post-Closing Trial Balance
                                                          December 31, 2011

Account Title 
Debits
Credits
Cash 
          45,000
 
Investments
 
 
        110,000
 
Accounts receivable
 
          60,000
 
Inventories
 
 
        200,000
 
Prepaid insurance
 
            9,000
 
Land
 
 
          90,000
 
Buildings
 
 
        420,000
 
Accumulated depreciation - buildings
 
        100,000
Equipment
 
 
        110,000
 
Accumulated depreciation - equipment
 
          60,000
Patents (net of amortization)
 
          10,000
 
Accounts payable
 
 
          75,000
Notes payable
 
 
 
        130,000
Interest payable
 
 
          20,000
Bonds payable
 
 
        240,000
Common stock
 
 
        300,000
Retained earnings
 
 
        129,000
  Totals
 
 
     1,054,000
     1,054,000

 
Additional Information:
Common stock investment
 
 $       30,000
Intention to hold (years)
 
                  3
Land cost
 
 
 $       25,000
Cash set aside to pay bonds payable
 $       15,000
Cash set aside in 3-month treasury bill
 $       23,000
Note due in six months
 
 $       30,000
Note due in six years
 
 $       50,000
Note due in five annual installments
 $       50,000
Installments amounts beginning 2/15/2012
 $       10,000
Accounts Receivable balance
 
 $       60,000
Allowance for uncollectible accounts
 $         8,000
Shares of common stock
 
        100,000
Shares of common stock authorized
        500,000

Please see the attachment for solution.


File name: P03-03 Almway Corporation.xls  File type: doc PRICE: $8