GIVEN INFORMATION:In recent years, EVBOLT Industries has faced challenges due to the high cost of capital, limitingits ability to undertake significant capital investments. However, with a recent decline in capitalcosts, the company is now considering a substantial expansion program proposed by the marketingdepartment. As an assistant to Leigh Jones, the financial vice president, your initial task is toestimate EVBOLT's cost of capital. Jones has provided relevant data for this task:(1) The firm's tax rate is 40%.(2) The current price of EVBOLT's 12% coupon, semiannual payment, noncallable bonds with 15years remaining to maturity is $1,153.72. The company does not use short-term interest-bearingdebt on a permanent basis, and new bonds would be privately placed with no flotation cost.(3) The current price of the firm's 10%, $100 par value, quarterly dividend, perpetual preferredstock is $116.95. Flotation costs equal to 5% of the proceeds would be incurred on a new issue.(4) EVBOLT's common stock is currently priced at $50 per share. Its last dividend (Do) was $3.12,and dividends are expected to grow at a constant rate of 5.8%. The company's beta is 1.2, the yieldon T-bonds is 5.6%, and the market risk premium is estimated at 6%. For the own-bond-yield-plus-judgmental-risk-premium approach, the firm uses a 3.2% risk premium.(5) EVBOLT's target capital structure is 30% long-term debt, 10% preferred stock, and 60%common equity.Questions h through k:h. What is EVBOLT's weighted average cost of capital (WACC)?i. What factors influence a company's WACC?j. Should the company use its overall WACC as the hurdle rate for each of its divisions?k. What are three types of project risk? How can each type of risk be considered when thinkingabout the new division's cost of capital?

Calculate the cost of debt (Kd)Given that the current price of the firm's 12% coupon, semiannual…

Answered: tax rate is 40%.

Business

Finance

tax rate is 40%.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter11: Determining The Cost Of Capital

Section: Chapter Questions

Problem 1MC: During the last few years, Jana Industries has been too constrained by the high cost of capital to...

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During the last few years, Jana Industries has been too constrained by the high cost of capital to make many capital investments. Recently, though, capital costs have been declining, and the company has decided to look seriously at a major expansion program proposed by the marketing department. Assume that you are an assistant to Leigh Jones, the financial vice president. Your first task is to estimate Jana’s cost of capital. Jones has provided you with the following data, which she believes may be relevant to your task: The firm’s tax rate is 40%. The current price of Jana’s 12% coupon, semiannual payment, noncallable bonds with 15 years remaining to maturity is $1,153.72. Jana does not use short-term interest-bearing debt on a permanent basis. New bonds would be privately placed with no flotation cost. The current price of the firm’s 10%, $100 par value, quarterly dividend, perpetual preferred stock is $116.95. Jana would incur flotation costs equal to 5% of the proceeds on a new issue. Jana’s common stock is currently selling at $50 per share. Its last dividend (D0) was $3.12, and dividends are expected to grow at a constant rate of 5.8% in the foreseeable future. Jana’s beta is 1.2, the yield on T-bonds is 5.6%, and the market risk premium is estimated to be 6%. For the own-bond-yield-plus-judgmental-risk-premium approach, the firm uses a 3.2% risk premium. Jana’s target capital structure is 30% long-term debt, 10% preferred stock, and 60% common equity. To help you structure the task, Leigh Jones has asked you to answer the following questions: (1) What sources of capital should be included when you estimate Jana’s weighted average cost of capital? (2) Should the component costs be figured on a before-tax or an after-tax basis? (3) Should the costs be historical (embedded) costs or new (marginal) costs?
Travellers Inn (Millions of Dollars) Cash $ 10 Accounts payable $ 10 Accounts 20 Accruals 15 receivable Inventories 20 Short-term debt Current assets $ 50 Current liabilities $ 25 Net fixed assets 50 Long-term debt 30 Preferred stock (50,000 shares) 5 Common equity Common stock (3,800,000 shares) $ 10 Retained earnings 30 Total common equity $ 40 Total assets $100 Total liabilities and equity $100 The following facts also apply to TII: 1. The long-term debt consists of 29,412 bonds, each having a 20-year maturity, semiannual payments, a coupon rate of 7.8%, and a face value of $1,000. Currently, these bonds provide investors with a yield to maturity of 11.8%. If new bonds were sold, they would have an 11.8% yield to maturity. 2. TII's perpetual preferred stock has a $100 par value, pays a quarterly dividend per share of $2, and has a yield to investors of 8%. New perpetual preferred stock would have to provide the same yield to investors, and the company would incur a 3.55% flotation…
To support growth strategies and combat competition with rivals, businesses seek external capital to further develop products and services in hopes to create new sales opportunities. Since capital investment often involves a huge money investment, longer time engagement and risks of uncertainties, any decision shall not be taken lightly and shall be carefully evaluated before putting money to start a long-term project. The goal is to ultimately make the right accept/reject decision. Respond to the following in a minimum of 175 words: Discuss criteria and techniques used to evaluate a capital project. Which criteria and techniques do you consider the most useful? As a financial manager, would you use the same criteria or evaluation techniques for any capital project? Why or why not?
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Analyze why, despite employing various investment appraisal techniques, large investment projects in big corporations may fail to deliver their estimated cash flows. Critically assess how a failed capital project may affect key stakeholders and shareholder value, and also shape the future strategy of investment capital. (Min Ans Required: 800 words)
what comment can be made on this or what can be added to it? The weighted average cost of capital is a calculation that can be done by a business to determine how much it will cost to borrow money to generate capital (WACC, n.d.). The result of this calculation will help business determine if financing a project is an investment that will yield positive returns (WACC, n.d.). The WACC takes into account the cost of equity and the cost of debt to figure out whether an investment is worth taking on (WACC, n.d.).
You and your colleague, Adam, are currently participating in a finance internship program at Ironworks Railroad. Your current assignment is to work together to review Ironworks’s current and projected income statements. You will also assess the consequences of management’s capital structure and investment decisions on the firm’s future riskiness. After much discussion, you and Adam decide to calculate Ironworks’s degree of operating leverage (DOL), degree of financial leverage (DFL), and degree of total leverage (DTL) based on this year’s data to gain insights into Ironworks’s risk levels. The most recent income statement for Ironworks Railroad follows. Ironworks is funded solely with debt capital and common equity, and it has 2,000,000 shares of common stock currently outstanding. This Year’s Data Next Year’s Projected Data Sales $60,000,000 $64,500,000 Less: Variable costs 36,000,000 38,700,000 Gross profit $24,000,000 $25,800,000 Less: Fixed operating costs…
Several factors affect a firm’s need for external funds. Evaluate the effect of each following factor and place a check next to each factor that is likely to increase a firm’s need for external capital—that is, its AFN (additional funds needed). Check all that apply. -The firm previously thought its fixed assets were being operated at full capacity, but now it learns that it actually has excess capacity. -The firm’s forecasted sales are unexpectedly increased. -The firm switches its supplier for the majority of its raw materials. The new supplier offers less favorable credit terms and thus reduces the trade credit available to the firm, resulting in a reduction in accounts payable. Dividends to common shareholders are paid out of after-tax earnings. Do these payouts affect a firm’s AFN? -Yes, dividends still affect a firm’s AFN even though they are paid out of after-tax earnings. -No, dividends do not affect a firm’s AFN, because they are paid…
Please the question in its entirety! 3. Understanding the IRR and NPV The net present value (NPV) and internal rate of return (IRR) methods of investment analysis are interrelated and are sometimes used together to make capital budgeting decisions. Consider the case of Cold Goose Metal Works Inc.: Last Tuesday, Cold Goose Metal Works Inc. lost a portion of its planning and financial data when both its main and its backup servers crashed. The company’s CFO remembers that the internal rate of return (IRR) of Project Omicron is 13.8%, but he can’t recall how much Cold Goose originally invested in the project nor the project’s net present value (NPV). However, he found a note that detailed the annual net cash flows expected to be generated by Project Omicron. They are: Year Cash Flow Year 1 $2,400,000 Year 2 $4,500,000 Year 3 $4,500,000 Year 4 $4,500,000 The CFO has asked you to compute Project Omicron’s initial investment using the information currently…
Managers can choose from several analytical techniques to help them make capital investment decisions. Each technique has advantages and disadvantages. Respond to the following in a minimum of 175 words: Provide an example or brief business case in which you can apply the NPV, IRR or payback concepts to make the most adequate financial decision. Select one of the techniques - NPV, IRR, or payback and explain why you would choose this technique as well as any disadvantages when compared to the others.
Task 1 The Board is considering replacing or redeveloping the leading product you have chosen. This will require considerable new investment. a) Use TWO investment appraisal techniques to describe TWO alternative sources of finance that would support the board's strategy. b) Contrast the usefulness of the two investment appraisal techniques you have selected c) Analyse two international aspects of financial risk management that could impact on the board's strategy. d) Analyse and explain the cost involved in managing these two aspects. SFM - LO 1 (pcs 1.1, 1.3) SGF - LO5 (pcs 5.1, 5.2, 5.3)
For this assignment, you will apply what you have learned from the unit lesson and required unit resources. The Waterways (WP27) case is located on page 27-35 of the textbook. Waterways puts much emphasis on cash flow when it plans for capital investments. The company chose its discount rate of 8% based on the rate of return that it must pay its owners and creditors. Using that rate, Waterways then uses different methods to determine the best decisions for making capital outlays. This year, Waterways is considering buying five new backhoes to replace the backhoes it now has. The new backhoes are faster, cost less to run, provide for more accurate trench digging, have comfort features for the operators, and have 1-year maintenance agreements to go with them. The old backhoes are working just fine, but they do require considerable maintenance. The backhoe operators are very familiar with the old backhoes and would need to learn some new skills to use the new backhoes. The following…