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

 

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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.


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