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Matsumoto Limited (ML), a large conglomerate firm, has a capital structure that currently consists of 20 percent long-term debt, 10 percent preferred stock, and 70 percent common equity. ML has determined that it will raise funds in the future using 40 percent long-term debt, 10 percent preferred stock, and 50 percent common equity. ML can raise up to $60 million in the long-term debt market at a pretax cost of 15 percent. Beyond $60 million, the pretax cost of long-term debt is expected to increase to 17 percent. Preferred stock can be raised at a cost of 19 percent. The limited demand for this security permits ML to sell only $20 million of preferred stock. ML’s marginal tax rate is 40 percent. ML’s stock currently sells for $30 per share and has a beta of 1.2. ML pays no dividends and is not expected to pay any dividends for the foreseeable future. Investment advisory services expect the stock price to increase from its current level of $30 per share to a level of $84.46 per share at the end of 5 years. New shares can be sold to net the company $28.81. ML expects earnings after taxes and available for common stockholders to be $70 million. Compute the marginal cost of capital schedule for ML, and determine the break points in the schedule. Use Table II to answer the questions. Round your answers for break points to the nearest dollar. Round your answers for weighted marginal cost of capital to two decimal places. Enter your answer in whole dollar. For example, an answer of $1.20 million should be entered as 1,200,000, not 1.20. Break point Weighted marginal cost of capital $     % $     % $     %

Matsumoto Limited (ML), a large conglomerate firm, has a capital structure that currently consists of 20 percent long-term debt, 10 percent preferred stock, and 70 percent common equity. ML has determined that it will raise funds in the future using 40 percent long-term debt, 10 percent preferred stock, and 50 percent common equity. ML can raise up to $60 million in the long-term debt market at a pretax cost of 15 percent. Beyond $60 million, the pretax cost of long-term debt is expected to increase to 17 percent. Preferred stock can be raised at a cost of 19 percent. The limited demand for this security permits ML to sell only $20 million of preferred stock. ML’s marginal tax rate is 40 percent. ML’s stock currently sells for $30 per share and has a beta of 1.2. ML pays no dividends and is not expected to pay any dividends for the foreseeable future. Investment advisory services expect the stock price to increase from its current level of $30 per share to a level of $84.46 per share at the end of 5 years. New shares can be sold to net the company $28.81. ML expects earnings after taxes and available for common stockholders to be $70 million. Compute the marginal cost of capital schedule for ML, and determine the break points in the schedule. Use Table II to answer the questions. Round your answers for break points to the nearest dollar. Round your answers for weighted marginal cost of capital to two decimal places. Enter your answer in whole dollar. For example, an answer of $1.20 million should be entered as 1,200,000, not 1.20. Break point Weighted marginal cost of capital $     % $     % $     %

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Matsumoto Limited (ML), a large conglomerate firm, has a capital structure that currently consists of 20 percent long-term debt, 10 percent preferred stock, and 70 percent common equity. ML has determined that it will raise funds in the future using 40 percent long-term debt, 10 percent preferred stock, and 50 percent common equity.
ML can raise up to $60 million in the long-term debt market at a pretax cost of 15 percent. Beyond $60 million, the pretax cost of long-term debt is expected to increase to 17 percent. Preferred stock can be raised at a cost of 19 percent. The limited demand for this security permits ML to sell only $20 million of preferred stock. ML’s marginal tax rate is 40 percent. ML’s stock currently sells for $30 per share and has a beta of 1.2. ML pays no dividends and is not expected to pay any dividends for the foreseeable future. Investment advisory services expect the stock price to increase from its current level of $30 per share to a level of $84.46 per share at the end of 5 years. New shares can be sold to net the company $28.81. ML expects earnings after taxes and available for common stockholders to be $70 million.
Compute the marginal cost of capital schedule for ML, and determine the break points in the schedule. Use Table II to answer the questions. Round your answers for break points to the nearest dollar. Round your answers for weighted marginal cost of capital to two decimal places. Enter your answer in whole dollar. For example, an answer of $1.20 million should be entered as 1,200,000, not 1.20.

Break point Weighted marginal cost of capital
$     %
$     %
$     %
 

 

Safari File Edit View History Bookmarks Window Help Mon Apr 11 7:01 PM + 88 00 cnow.apps.ng.cengage.com b MindTap - Cengage Learning table5a_2.jpg 710×953 pixels Таxes Work Force TABLE II Present Value Interest Factor (PVIF) ($1 at i % per period for n periods); PVIF = 1 ; PVo = FV,(PVIFi) (1+ i)"" Period, n 2% 3% 1.000 1.000 0.980 0.971 4% 5% 7% 1.000 8% 1.000 0.926 0.857 10% 11% 1.000 12% 1.000 1% 6% 9% 13% BUS300A 1.000 0.990 1.000 0.962 1.000 0.952 1.000 0.943 0.890 1.000 0.917 1.000 0.909 1.000 0.885 Photos 1 0.935 0.901 0.893 0.925 0.889 0.855 0.907 0.864 0.823 0.784 0.746 0.711 0.677 0.873 0.816 0.763 0.842 0.772 0.708 0.650 0.596 0.547 0.502 2 0.980 0.961 0.943 0.826 0.812 0.797 0.712 0.636 0.567 0.783 Screen Shot 0.840 0.792 0.794 0.735 0.731 0.659 0.693 0.613 3 0.971 0.942 0.915 0.961 0.751 0.683 0.924 0.889 2022-0...53.23 PM 0.713 0.666 0.681 0.630 0.583 0.540 0.500 0.463 0.429 0.397 0.368 0.340 0.315 0.292 0.951 0.906 0.863 0.942 0.822 0.790 0.747 0.705 0.665 0.627 0.592 0.558 0.621 0.564 0.593 0.535 0.543 0.480 0.888 0.838 0.507 0.623 0.582 0.425 0.376 7 0.933 0.923 0.871 0.813 0.853 0.789 0.760 0.731 0.513 0.482 0.452 0.404 0.361 0.467 0.434 BUS301A- BUS474A 0.333 0.295 0.261 0.231 0.204 0.181 0.160 0.141 0.125 0.837 0.766 9. 10 0.645 0.614 0.544 0.508 0.914 0.703 0.676 0.460 0.422 0.424 0.386 0.391 0.352 0.905 0.820 0.744 0.322 Integrati...lem.xlsx 0.585 0.557 0.350 0.319 11 0.896 0.887 0.804 0.722 0.650 0.527 0.497 0.469 0.442 0.475 0.388 0.356 0.326 0.299 0.317 0.286 0.287 12 0.788 0.701 0.625 0.444 0.257 0.415 0.388 0.362 0.339 0.317 0.296 0.276 0.258 0.197 0.184 0.290 0.263 0.258 13 14 0.879 0.870 0.861 0.853 0.844 0.836 0.773 0.681 0.758 0.661 0.601 0.577 0.530 0.505 0.229 0.205 0.232 15 16 0.743 0.642 0.728 0.623 0.714 0.605 0.700 0.587 0.555 0.534 0.513 0.494 0.275 0.252 0.239 0.218 0.198 0.209 0.188 0.183 0.163 0.481 0.417 0.394 0.371 0.350 0.331 0.312 0.247 0.233 0.174 0.097 0.054 0.030 0.458 17 18 0.436 0.416 0.396 0.377 0.310 0.295 0.231 0.270 0.250 0.170 0.153 0.146 0.130 0.212 0.180 0.111 0.232 0.215 0.158 0.146 19 20 0.686 0.570 0.673 0.554 0.475 0.456 0.828 0.820 0.788 0.622 0.492 0.780 0.610 0.478 0.194 0.178 0.126 0.116 0.164 0.149 0.102 0.092 0.138 0.116 0.104 0.098 0.087 0.124 0.082 0.074 2021.11.15 Letter 24 25 0.390 0.375 0.066 0.059 0.053 0.047 from CSEU 0.131 0.067 0.034 0.017 0.099 0.046 0.021 0.010 0.044 30 40 0.026 0.008 0.742 0.672 0.608 0.550 0.552 0.412 0.453 0.307 0.308 0.208 0.141 0.095 0.231 0.142 0.087 0.054 0.075 0.032 0.057 0.022 0.033 0.015 0.011 50 60 0.372 0.228 0.305 0.170 0.013 0.006 0.009 0.003 0.005 0.002 0.003 0.002 0.001 0.001 Period, n 14% 15% 16% 17% 18% 19% 20% 24% 28% 32% 36% 40% 1.000 0.877 1.000 1.000 0.862 1.000 1.000 0.847 1.000 0.840 1.000 0.833 0.694 0.579 1.000 0.806 1.000 0.781 0.610 0.477 0.373 0.291 1.000 1.000 1.000 0.714 1 0.870 0.855 0.758 0.735 PDF 0.769 0.675 2 0.756 0.658 0.572 0.497 0.743 0.731 0.718 0.706 0.593 0.650 0.574 0.435 0.329 0.250 0.541 0.398 0.292 0.215 0.510 0.641 0.624 0.609 0.524 0.364 Notice of 0.482 0.402 0.335 0.279 0.233 0.194 0.534 0.456 0.423 0.341 4 0.592 0.519 0.456 0.400 0.552 0.476 0.410 0.354 0.516 0.437 0.499 0.419 0.352 0.296 0.260 0.186 Appearance.pdf 0.432 0.376 0.327 0.284 0.247 0.215 0.187 0.163 0.390 0.333 0.275 0.222 0.179 0.227 0.178 0.139 0.108 6. 7 0.370 0.189 0.143 0.108 0.158 0.116 0.133 0.095 0.314 0.285 0.243 0.208 0.178 0.152 0.130 0.111 0.095 0.081 0.069 0.085 0.063 0.046 0.034 8 9. 0.249 0.209 0.176 0.148 0.124 0.104 0.351 0.308 0.305 0.263 0.227 0.195 0.266 0.225 0.191 0.162 0.068 0.048 0.144 0.082 0.270 0.237 0.208 0.182 0.162 0.135 0.112 10 11 0.085 0.066 0.062 0.047 0.116 0.035 0.025 0.018 0.013 0.094 0.168 0.145 0.125 0.108 0.093 0.080 0.052 0.040 12 0.076 0.061 0.036 0.027 0.021 0.016 0.025 0.137 0.116 13 0.093 0.018 0.099 0.084 0.071 0.060 0.051 0.043 0.037 0.019 0.049 0.040 0.032 0.026 0.021 0.017 0.032 0.025 0.019 0.015 0.014 0.010 0.007 0.009 0.006 0.005 0.003 14 15 0.160 0.140 0.123 0.108 0.141 0.123 0.107 0.088 0.078 0.065 0.054 0.045 0.038 0.031 0.074 16 17 0.012 0.009 0.007 0.005 0.062 0.093 0.081 0.070 0.061 0.035 0.005 0.004 0.003 0.002 0.001 0.052 18 19 0.095 0.083 0.069 0.060 0.059 0.051 0.043 0.023 0.044 0.037 0.012 0.009 0.007 0.003 0.002 0.001 0.000 0.000 0.002 0.002 0.001 0.000 20 24 0.073 0.043 0.051 0.028 0.031 0.015 0.026 0.013 0.014 0.006 0.004 0.001 0.030 0.015 0.004 0.001 0.020 0.009 0.002 0.000 0.010 0.004 0.001 0.000 0.005 0.002 0.000 0.000 0.000 0.000 0.000 0.000 25 30 0.038 0.020 0.024 0.012 0.016 0.007 0.013 0.005 0.001 0.000 0.000 0.000 BUS301A- 40 50 0.005 0.001 0.003 0.001 0.001 0.000 0.001 0.000 0.000 0.000 0.000 0.000 Discussion 4 60 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 APR 11 W X
Transcribed Image Text:Safari File Edit View History Bookmarks Window Help Mon Apr 11 7:01 PM + 88 00 cnow.apps.ng.cengage.com b MindTap - Cengage Learning table5a_2.jpg 710×953 pixels Таxes Work Force TABLE II Present Value Interest Factor (PVIF) ($1 at i % per period for n periods); PVIF = 1 ; PVo = FV,(PVIFi) (1+ i)"" Period, n 2% 3% 1.000 1.000 0.980 0.971 4% 5% 7% 1.000 8% 1.000 0.926 0.857 10% 11% 1.000 12% 1.000 1% 6% 9% 13% BUS300A 1.000 0.990 1.000 0.962 1.000 0.952 1.000 0.943 0.890 1.000 0.917 1.000 0.909 1.000 0.885 Photos 1 0.935 0.901 0.893 0.925 0.889 0.855 0.907 0.864 0.823 0.784 0.746 0.711 0.677 0.873 0.816 0.763 0.842 0.772 0.708 0.650 0.596 0.547 0.502 2 0.980 0.961 0.943 0.826 0.812 0.797 0.712 0.636 0.567 0.783 Screen Shot 0.840 0.792 0.794 0.735 0.731 0.659 0.693 0.613 3 0.971 0.942 0.915 0.961 0.751 0.683 0.924 0.889 2022-0...53.23 PM 0.713 0.666 0.681 0.630 0.583 0.540 0.500 0.463 0.429 0.397 0.368 0.340 0.315 0.292 0.951 0.906 0.863 0.942 0.822 0.790 0.747 0.705 0.665 0.627 0.592 0.558 0.621 0.564 0.593 0.535 0.543 0.480 0.888 0.838 0.507 0.623 0.582 0.425 0.376 7 0.933 0.923 0.871 0.813 0.853 0.789 0.760 0.731 0.513 0.482 0.452 0.404 0.361 0.467 0.434 BUS301A- BUS474A 0.333 0.295 0.261 0.231 0.204 0.181 0.160 0.141 0.125 0.837 0.766 9. 10 0.645 0.614 0.544 0.508 0.914 0.703 0.676 0.460 0.422 0.424 0.386 0.391 0.352 0.905 0.820 0.744 0.322 Integrati...lem.xlsx 0.585 0.557 0.350 0.319 11 0.896 0.887 0.804 0.722 0.650 0.527 0.497 0.469 0.442 0.475 0.388 0.356 0.326 0.299 0.317 0.286 0.287 12 0.788 0.701 0.625 0.444 0.257 0.415 0.388 0.362 0.339 0.317 0.296 0.276 0.258 0.197 0.184 0.290 0.263 0.258 13 14 0.879 0.870 0.861 0.853 0.844 0.836 0.773 0.681 0.758 0.661 0.601 0.577 0.530 0.505 0.229 0.205 0.232 15 16 0.743 0.642 0.728 0.623 0.714 0.605 0.700 0.587 0.555 0.534 0.513 0.494 0.275 0.252 0.239 0.218 0.198 0.209 0.188 0.183 0.163 0.481 0.417 0.394 0.371 0.350 0.331 0.312 0.247 0.233 0.174 0.097 0.054 0.030 0.458 17 18 0.436 0.416 0.396 0.377 0.310 0.295 0.231 0.270 0.250 0.170 0.153 0.146 0.130 0.212 0.180 0.111 0.232 0.215 0.158 0.146 19 20 0.686 0.570 0.673 0.554 0.475 0.456 0.828 0.820 0.788 0.622 0.492 0.780 0.610 0.478 0.194 0.178 0.126 0.116 0.164 0.149 0.102 0.092 0.138 0.116 0.104 0.098 0.087 0.124 0.082 0.074 2021.11.15 Letter 24 25 0.390 0.375 0.066 0.059 0.053 0.047 from CSEU 0.131 0.067 0.034 0.017 0.099 0.046 0.021 0.010 0.044 30 40 0.026 0.008 0.742 0.672 0.608 0.550 0.552 0.412 0.453 0.307 0.308 0.208 0.141 0.095 0.231 0.142 0.087 0.054 0.075 0.032 0.057 0.022 0.033 0.015 0.011 50 60 0.372 0.228 0.305 0.170 0.013 0.006 0.009 0.003 0.005 0.002 0.003 0.002 0.001 0.001 Period, n 14% 15% 16% 17% 18% 19% 20% 24% 28% 32% 36% 40% 1.000 0.877 1.000 1.000 0.862 1.000 1.000 0.847 1.000 0.840 1.000 0.833 0.694 0.579 1.000 0.806 1.000 0.781 0.610 0.477 0.373 0.291 1.000 1.000 1.000 0.714 1 0.870 0.855 0.758 0.735 PDF 0.769 0.675 2 0.756 0.658 0.572 0.497 0.743 0.731 0.718 0.706 0.593 0.650 0.574 0.435 0.329 0.250 0.541 0.398 0.292 0.215 0.510 0.641 0.624 0.609 0.524 0.364 Notice of 0.482 0.402 0.335 0.279 0.233 0.194 0.534 0.456 0.423 0.341 4 0.592 0.519 0.456 0.400 0.552 0.476 0.410 0.354 0.516 0.437 0.499 0.419 0.352 0.296 0.260 0.186 Appearance.pdf 0.432 0.376 0.327 0.284 0.247 0.215 0.187 0.163 0.390 0.333 0.275 0.222 0.179 0.227 0.178 0.139 0.108 6. 7 0.370 0.189 0.143 0.108 0.158 0.116 0.133 0.095 0.314 0.285 0.243 0.208 0.178 0.152 0.130 0.111 0.095 0.081 0.069 0.085 0.063 0.046 0.034 8 9. 0.249 0.209 0.176 0.148 0.124 0.104 0.351 0.308 0.305 0.263 0.227 0.195 0.266 0.225 0.191 0.162 0.068 0.048 0.144 0.082 0.270 0.237 0.208 0.182 0.162 0.135 0.112 10 11 0.085 0.066 0.062 0.047 0.116 0.035 0.025 0.018 0.013 0.094 0.168 0.145 0.125 0.108 0.093 0.080 0.052 0.040 12 0.076 0.061 0.036 0.027 0.021 0.016 0.025 0.137 0.116 13 0.093 0.018 0.099 0.084 0.071 0.060 0.051 0.043 0.037 0.019 0.049 0.040 0.032 0.026 0.021 0.017 0.032 0.025 0.019 0.015 0.014 0.010 0.007 0.009 0.006 0.005 0.003 14 15 0.160 0.140 0.123 0.108 0.141 0.123 0.107 0.088 0.078 0.065 0.054 0.045 0.038 0.031 0.074 16 17 0.012 0.009 0.007 0.005 0.062 0.093 0.081 0.070 0.061 0.035 0.005 0.004 0.003 0.002 0.001 0.052 18 19 0.095 0.083 0.069 0.060 0.059 0.051 0.043 0.023 0.044 0.037 0.012 0.009 0.007 0.003 0.002 0.001 0.000 0.000 0.002 0.002 0.001 0.000 20 24 0.073 0.043 0.051 0.028 0.031 0.015 0.026 0.013 0.014 0.006 0.004 0.001 0.030 0.015 0.004 0.001 0.020 0.009 0.002 0.000 0.010 0.004 0.001 0.000 0.005 0.002 0.000 0.000 0.000 0.000 0.000 0.000 25 30 0.038 0.020 0.024 0.012 0.016 0.007 0.013 0.005 0.001 0.000 0.000 0.000 BUS301A- 40 50 0.005 0.001 0.003 0.001 0.001 0.000 0.001 0.000 0.000 0.000 0.000 0.000 Discussion 4 60 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 APR 11 W X
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