1. Readable Materials Inc., a manufacturer of coated freshet and coated ground-wood paper used in catalogs, magazines and commercial printing applications, has three issues on bonds outstanding. The following table describes these issues: Price Face Value Coupon Rate Frequency Maturity (Years) Bonds Issue A $850.00 $1,000.00 7.00% Semiannually 15 1000 Issue B $1,150.00 $1,000.00 11.00% Annually 20 2000 Issue C $900.00 $1,000.00 9.00% Quarterly 30 3000 1 In addition, the firm's 100K preferred shares of stock pay $0.75 per share quarterly and currently have a market price of $30 per share and a book value of $20 per share. The flotation costs for debt, preferred, and common equity are 3%, 5%, and 7% respectively. The current price per share of the firm's 200K common stocks is $50, but they have book value of $30 per share. The firm expects an average common dividend growth rate of 3% indefinitely and a dividend yield of 12% for the next year. The firm's beta coefficient is 1.5 and its marginal tax rate is 40%. If the current risk free rate and market risk premium are 3% and 7% respectively, answer the following: a. What are the book and market value weights for each source of capital? b. What are the component costs of capital? (i.e., debt, preferred equity, retained earnings, and new common equity.) Use the weighted average of the bond market values to determine the cost of debt and the arithmetic average of the dividend discount model and CAPM model for the cost of retained earnings. c. What is the weighted average cost of capital using both the market and book value weights? 1. Readable Materials Inc., a manufacturer of coated freshet and coated ground-wood paper used in catalogs, magazines and commercial printing applications, has three issues on bonds outstanding. The following table describes these issues: Price Face Value Coupon Rate Frequency Maturity (Years) Bonds Issue A $850.00 $1,000.00 7.00% Semiannually 15 1000 Issue B $1,150.00 $1,000.00 11.00% Annually 20 2000 Issue C $900.00 $1,000.00 9.00% Quarterly 30 3000 1 In addition, the firm's 100K preferred shares of stock pay $0.75 per share quarterly and currently have a market price of $30 per share and a book value of $20 per share. The flotation costs for debt, preferred, and common equity are 3%, 5%, and 7% respectively. The current price per share of the firm's 200K common stocks is $50, but they have book value of $30 per share. The firm expects an average common dividend growth rate of 3% indefinitely and a dividend yield of 12% for the next year. The firm's beta coefficient is 1.5 and its marginal tax rate is 40%. If the current risk free rate and market risk premium are 3% and 7% respectively, answer the following: a. What are the book and market value weights for each source of capital? b. What are the component costs of capital? (i.e., debt, preferred equity, retained earnings, and new common equity.) Use the weighted average of the bond market values to determine the cost of debt and the arithmetic average of the dividend discount model and CAPM model for the cost of retained earnings. c. What is the weighted average cost of capital using both the market and book value weights
