EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN: 9781337514835
Author: MOYER
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Chapter 12, Problem 14P
Summary Introduction
To determine: The marginal cost of capital schedule.
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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…
Dynamic World Vista Industries (DWVI) wishes to estimate its cost of capital for use in analyzing projects that are similar to those that already exist. The firm's current capital structure, in terms of market value, includes 30 percent corporate bond, 10 percent irredeemable loan notes, 10 percent preference shares and 50 percent ordinary shares.
The firm's corporate bond has an average yield to maturity of 8.3 percent. DWVI also has an irredeemable loan notes currently trading at GHc 40 ex interest an interest rate of five (5) percent. Its preference shares have a Gllc 70 par value, an 8 percent dividend, and are currently selling for GHc 76 per share. DWVI's beta is 1.05, return on riskless asset is 4 percent and the return on the GSE (the market proxy) is 11.4 percent. The industry is in the 40 percent marginal tax bracket.
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A certain company must raise SR 220 million to fund its next project. 25% of the funds will come from
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Chapter 12 Solutions
EBK CONTEMPORARY FINANCIAL MANAGEMENT
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