The target capital structure for Millennium Corporation is 50 percent common stock, 5 percent preferred stock, and 45 percent debt. Its cost of equity is 15 percent, the cost of preferred stock is 6 percent, and the cost of debt is 8 percent. The relevant tax rate is 35 percent. a) What is Millennium's WACC? – b) The company president has approached you about its capital structure. He wants to know why the company doesn't use more preferred stock financing because it costs less than debt. What would you tell the president? –

The target capital structure for Millennium Corporation is 50 percent common stock, 5 percent preferred stock, and 45 percent debt. Its cost of equity is 15 percent, the cost of preferred stock is 6 percent, and the cost of debt is 8 percent. The relevant tax rate is 35 percent. a) What is Millennium's WACC? – b) The company president has approached you about its capital structure. He wants to know why the company doesn't use more preferred stock financing because it costs less than debt. What would you tell the president? –

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

Problem 1PS

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Mullineaux Corporation has a target capital structure of 70 percent common stock, 5 percent preferred stock, and 25 percent debt. Its cost of equity capital is 11 percent, the cost of preferred stock is 5 percent, and the pretax cost of debt is 7 percent. The applicable tax rate is 35 percent. a) What is Mullineaux's Weighted Average Cost of Capital (WACC)? b) The company president has approached you about Mullineaux's capital structure. He wants to know why the company doesn't use more preferred stock financing because it costs less than debt. Is he correct? What would you tell the president? 10 11 Create your Original Solution Below - Be sure to show all calculations and clearly indicate answers.
The target capital structure for Millennium Corporation is 50 percent common stock, 5 percent preferred stock, and 45 percent debt. Its cost of equity is 15 percent, the cost of preferred stock is 6 percent, and the cost of debt is 8 percent. The relevant tax rate is 35 percent.a) What is Millennium’s WACC? b) The company president has approached you about its capital structure. He wants to know why the company doesn’t use more preferred stock financing because it costs less than debt. What would you tell the president?
Alfa Corporation (Alfa) has a target capital structure of 60% common stock, 5% preferred stock, and 35% debt. Its cost of equity is 11%, the cost of preferred stock is 5.5%, and the cost of debt is 7.2%. The relevant tax rate is 35%.i) What is Alfa’s weighted average cost of capital (WACC)?ii) The management has asked you about Alfa’s capital structure. They want to know why the company does not use more preferred stock financing, since it costs less than debt. What would you tell the management? Explain.
Cybernauts, Ltd., is a new firm that wishes to determine an appropriate capital structure. It can issue 16 percent debt or 15 percent preferred stock. The total capitalization of the company will be $5 million, and common stock can be sold at $20 per share. The company is expected to have a 50 percent tax rate (federal plus state). Four possible capital structures being considered are as follows: PLAN DEBT PREFERRED EQUITY 1 0% 0% 100% 2 30 0 70 3 50 0 50 4 50 20 30 a. Construct an EBIT - EPS chart for the four plans. (EBIT is expected to be $1 million.) Be sure to identify the relevant indifference points and determine the horizontal - axis intercepts. b. Which plan is best? Why?
Kuchar Corporation is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the company would have 175,000 shares of stock outstanding. Under Plan II, there would be 125,000 shares of stock outstanding and $1.47 million in debt outstanding. The interest rate on the debt is 5 percent and there are no taxes. a. Use MM Proposition I to find the price per share. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What is the value of the firm under each of the two proposed plans? (Do not round intermediate calculations. Enter your answers in dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567.)
Foundation, Incorporated, is comparing two different capital structures: an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the company would have 200,000 shares of stock outstanding. Under Plan II, there would be 150,000 shares of stock outstanding and $2.15 million in debt outstanding. The interest rate on the debt is 5 percent and there are no taxes. a. Use M&M Proposition I to find the price per share. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What is the value of the firm under each of the two proposed plans? (Do not round intermediate calculations and round your answers to the nearest whole dollar amount, e.g., 32.) a. share price? b. all-equity firm value? b levered plan firm value?
Honeycutt Co. is comparing two different capital structures. Plan I would result in 12,700 shares of stock and $109,250 in debt. Plan II would result in 9,800 shares of stock and $247,000 in debt. The interest rate on the debt is 10 percent. The all-equity plan would result in 15,000 shares of stock outstanding. Ignore taxes for this problem. a. What is the price per share of equity under Plan I? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What is the price per share of equity under Plan II? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) a. Price per share b. Price per share
Please help... Keenan Corp is comparing two different capital structures. Plan I would result in 7,000 shares of stock and 160,000 in debt. Plan II would result in 5,000 shares of stock and 240,000 in debt. The Interest rate is 10 percent. Tax rate is 40 percent. 1. Compare both of these plans to an all-equity plan assuming that EBIT will be 39,000. The all-equity plan would result in 11,000 shares of stock outstanding. Which of the three plans has the highest EPS ? The Lowest ? 2. in part (1), what are the break-even levels of EBIT for each plan as compared to that for an all-equity plan? Is one higher than the other ? why? Thank youuuu
The cost of preferred stock is 6 percent, and the cost of debt is 8 percent. The relevant tax rate is 35 percent. The company president has approached you about its capital structure. He wants to know why the company doesn’t use more preferred stock financing because it costs less than debt. What would you tell the president?
Coldstream Corp. is comparing two different capital structures. Plan I would result in 10,000 shares of stock and $100,000 in debt. Plan II would result in 5,000 shares of stock and $200,000 in debt. The interest rate on the debt is 6 percent. a. Assuming that the corporate tax rate is 40 percent, compare both of these plans to an all-equity plan assuming that EBIT will be $60,000. The all-equity plan would result in 15,000 shares of stock outstanding. What is the EPS for each of these plans? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) EPS Plan I $ Not attempted Plan II $ Not attempted All equity $ Not attempted d-2 Assuming that the corporate tax rate is 40 percent, what are the break-even levels of EBIT for each plan as compared to that for an all-equity plan? (Do not round intermediate calculations.) EBIT Plan I and all-equity $ Not attempted Plan II and all-equity $ Not attempted…
Foundation, Inc., is comparing two different capital structures: an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the company would have 145,000 shares of stock outstanding. Under Plan II, there would be 125,000 shares of stock outstanding and $716,000 in debt outstanding. The interest rate on the debt is 8 percent, and there are no taxes. Use M&M Proposition I to find the price per share of equity under each of the two proposed plans. What is the value of the firm? Input Area: Plan 1: Shares outstanding Plan II: Shares outstanding Debt outstanding Interest rate 2 ЕВIТ BEBIT 145,000 125,000 $716,000 8% $300,000 $600,000 1 5 (Use cells A6 to B13 from the given information
Foundation, Inc., is comparing two different capital structures: an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the company would have 145,000 shares of stock outstanding. Under Plan II, there would be 125,000 shares of stock outstanding and $716,000 in debt outstanding. The interest rate on the debt is 8 percent, and there are no taxes. Use M&M Proposition I to find the price per share of equity under each of the two proposed plans. What is the value of the firm? Input Area: Plan 1: Shares outstanding Plan II: Shares outstanding Debt outstanding Interest rate EBIT EBIT Output Area: 145,000 (Use cells A6 to B13 from the given information to complete this question.) Price V (1) v (11) 125,000 $716,000 8% $300,000 $600,000

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