20 -- Score- core- Question 3 (15 Marks) Zinger Corporation manufactures industrial type sewing machines. Zinger Corp. To large order from a few European countries. In order to be able to supply these al type sewing machines. Zinger Corp. received a very products, zinger will have to expand its facilities. Of the required expand $75 million internally, through retained earnings. The firm's op nities. Or the required expansion, Zinger feels it can raise debt, 10% preferred stock, and 45% equity. The company will try to nough retained earnings. The firm's optimum capital structure has been 45% financing this expansion plan. Cur stock, and 45% equity. The company will try to maintain this capital structure in s expansion plan. Currently Zinger's common stock is traded at a price of $20 per share. Last year's dividend was $1.50 per share. The growth rato end was $1.50 per share. The growth rate has been at 6% and is expected to increase to 70. The company's preferred stock is selling at $50 and has been yielding o m market. Flotation costs have been estimated at 8% of common stock and 3% of preferred stock. Corp. has bonds outstanding at 10%, but its investment dealer has informed the company that interest rates for bonds of equal risk are currently yielding 9%. Zinger's tax rate is 46%. A. Compute the cost of Kd, Kp, Ke, Kn. (8 marks) B. Calculate the weighted average cost of capital, assuming no external equity financing. (4 marks) C. How much can Zinger raise to fund the whole project, while using only internal financing? (3 marks) Question 4 (8 marks) The Abacus Computer Company has decided to use the Capital Asset Pricing Model to estimate its cost of equity. The firm's beta was estimated at 1.4. The S&P/TSX Composite-stock index has returned 12.5% to investors over a fairly long period of time, and Abacus has decided to use this value as the market return. Treasury bills are currently providing investors with a 6.5% yield. A. Calculate Abacus's cost of equity using the CAPM. (4 marks) B. If its beta was incorrectly estimated, and a new revised estimate of 1.8 was used in the calculations, what would its new estimate of the cost of equity be? (4 marks) Question 5 (7 Marks) List the 5 tools for evaluating capital budgeting and provide 2 pros and 2 cons for each of them (7 Marks) 11 Question 3 (15 Marks) Zinger Corporation manufactures industrial type sewing machines, Zange large order from a few European countries. In order to be able to supply these products, Zinger will have to expand its facilities. Of the required expansion $75 million internally, through retained earnings. The firm's optimum cap cities. Of the required expansion, Zinger feels it can raise debt, 10% preferred stock, and 45% equity. The company will try to me 1 earnings. The firm's optimum capital structure has been 45% financing this expansion plan. Currently Zinger's com yo equity. The company will try to maintain this capital structure in pansion plan. Currently Zinger's common stock is traded at a price of $20 per share. Last year's dividend was $1.50 per share. The growth ra end was $1.50 per share. The growth rate has been at 6% and is expected to increase to 8%. The company's preferred stock is selling at company's preferred stock is selling at $50 and has been yielding 6% in the current market. Flotation costs have been estimated at 8% of tation costs have been estimated at 8% of common stock and 3% of preferred stock. Zinger Corp. has bonds outstanding at 10% but its investment dealer has informed the company that interest rates for bonds of equal risk are currently yielding 9%. Zinger's tax rate is 46%. A. Compute the cost of Kd, Kp, Ke, Kn. (8 marks) 15. Calculate the weighted average cost of capital, assuming no external equity financing. (4 marks) C. How much can Zinger raise to fund the whole project, while using only internal financing? (3 marks) Question 4 (8 marks) The Abacus Computer Company has decided to use the Capital Asset Pricing Model to estimate its cost of equity. The firm's beta was estimated at 1.4. The S&P/TSX Composite-stock index has returned 12.5% to investors over a fairly long period of time, and Abacus has decided to use this value as the market return. Treasury bills are currently providing investors with a 6.5% yield. A. Calculate Abacus's cost of equity using the CAPM. (4 marks) B. If its beta was incorrectly estimated, and a new revised estimate of 1.8 was used in the calculations, what would its new estimate of the cost of equity be? (4 marks) Question 5 (7 Marks) List the 5 tools for evaluating capital budgeting and provide 2 pros and 2 cons for each of them (7 Marks) Question 6 (17 marks) Tabletop Ranches, Inc. is considering the purchase of a new helicopter for $425,000. The firm's old 1 9 85 000 but can only be sold for $60,000. on after taxes