BTC 45% 9:23 PM FINB211 HW 4 5 CD The capital structure of Sunshine Investments Inc. is outline below. Debt: The firm issued 10,000 25-year bonds 10 years ago at their par value of 1.000. The bonds curry a coupon rate of 14% and are now selling to yield 10% "preferred Stock: 30,000 shares of preferred stock were sold six years ago at a par value of $50. The shares pay a dividend of S6 per year. Similar preferred issues are now yielding 9% Equity: Sunshine Investments Ine's was initially financed by selling 2 million shares of common stock at S12. Accumulated retained carings are now $5 million. The stock is currently selling at $13.25 Sunshine tevestments Ine's Target Capital Structure is as follows. Debt 30.0% Preferred Stock 5.0% Common Equity 100,00 Other Information: Sunshine Investments inc's marginal tax rate state and federal) is 40% Flotation costs werage 12% for comment and preferred stock Short-term treasury bills currently yield 75% The market is returning 12.5% Sunshine Investments inc's beta is 12 The firm is expected to grow at 6% indefinitely. The last annual dividend paid was $1.00 per share Sunshine Investments Ine's expects to cam S5 million next year The firm can be an additional S2 million at rates similar to the market rum on its old debt. Beyond that lenders are expected to demand returns in the neighborhood of 14% Sunshine Investments Ine's has the following capital budgeting projects under consideration in the coming year. These represent its investment opportunity schedule (IOS) Capital Cumulative IRR Required Cap Re 15.0% SSM SIM B 14.0% S2M SSM C 13.0% S2M S7M 12.0% 52M 59M E 11.0% 52M SIIM Calculate the firm's capital structure based on book and market values and compare with the target capital structure. Is the target structure a reasonable approximation of the market value based structure is the book structure very far oft? b. Calculate the cost of debt based on the market return on the company's existing bunds Calculate the cost of preferred stock based on the market return on the company's eating preferred stock 4. Calculate the cost of retained camnings using the approaches, CAPM, dividend growth and risk premium Reconcile the results into a single estimate Estimate the cost of equity raised through the sale of new stock using the dividend growth approach U . BTC 45% 9:23 PM FINB211 HW 4 5 Preferred Stock 5.0 Commons Equity 65.0 1000 Other information: Sunshine investments inc's marginal tax rate (state and federal) is 47% Flotate costs average 12% for common and preferred stock Short-term treasury bills currently yield 7.3% The market is returning 12.5% Sunshine Investments Ine's beta is 12 The firm is expected to grow at indefinitely The last annual dividend paid was $1.00 per share Sunshine investments Ine's expects to cam 5 million text year. The firm can borrow an additional 52 million al rates similar to the market return on its old debt. Beyond that lenders are expected to demand runs in the neighborhood of 14% Sunshine Investments inc's has the following capital budgeting projects under consideration in the coming year. These represent its investment opportunity schedule (IOS) Capital Crative Project IRR Required Cap Reg 15.0% SIM SUM B 14.0% S2M SSM C 13.0%S2M 57M D 12.0% 52M 59M E 11.0% 52M SIIM a. Calculate the firm's capital structure based on book and market values and compare with the target capital structure is the target structure a reasonable approximation of the market value based structure is the book structure very far off! b. Calculate the cost of debt based on the market return on the company's existing bonds Calculate the cost of preferred stock based on the market return on the company's existing preferred stock 4. Calculate the cost of retained carnings using the approaches CAPM. Gividend growth, and risk premium. Reconcile the results into a single estimate c. Estimate the cost of equity raised through the sale of new stock using the dividend growth 1. Calculate the WACC using equity from retained camnings based on your component cost estimates and the target capital structure Where is the first breakpoint in the MCC (the point where retained earnings runs out! Calculate to the nearest SIM h. Calculate the WACC atter the first breakpoint Where is the second breakpoint in the MCC (the point at which the cost of det increases) Why does this second becak exist? Calculate to the nearest S.IM. Calculate the WACC after the second break k What is the WACC for the planning period Suppose project is self-Fending in that it comes with a source of its own debt financing A loan is offered through an equipment manufacturer at 6%. The cost of the loan is 9% (1-1) 5.4% Should project be accepted under such conditions? (30 points) BTC 45% 9:23 PM FINB211 HW 4 5 CD The capital structure of Sunshine Investments Inc. is outline below. Debt: The firm issued 10,000 25-year bonds 10 years ago at their par value of 1.000. The bonds curry a coupon rate of 14% and are now selling to yield 10% "preferred Stock: 30,000 shares of preferred stock were sold six years ago at a par value of $50. The shares pay a dividend of S6 per year. Similar preferred issues are now yielding 9% Equity: Sunshine Investments Ine's was initially financed by selling 2 million shares of common stock at S12. Accumulated retained carings are now $5 million. The stock is currently selling at $13.25 Sunshine tevestments Ine's Target Capital Structure is as follows. Debt 30.0% Preferred Stock 5.0% Common Equity 100,00 Other Information: Sunshine Investments inc's marginal tax rate state and federal) is 40% Flotation costs werage 12% for comment and preferred stock Short-term treasury bills currently yield 75% The market is returning 12.5% Sunshine Investments inc's beta is 12 The firm is expected to grow at 6% indefinitely. The last annual dividend paid was $1.00 per share Sunshine Investments Ine's expects to cam S5 million next year The firm can be an additional S2 million at rates similar to the market rum on its old debt. Beyond that lenders are expected to demand returns in the neighborhood of 14% Sunshine Investments Ine's has the following capital budgeting projects under consideration in the coming year. These represent its investment opportunity schedule (IOS) Capital Cumulative IRR Required Cap Re 15.0% SSM SIM B 14.0% S2M SSM C 13.0% S2M S7M 12.0% 52M 59M E 11.0% 52M SIIM Calculate the firm's capital structure based on book and market values and compare with the target capital structure. Is the target structure a reasonable approximation of the market value based structure is the book structure very far oft? b. Calculate the cost of debt based on the market return on the company's existing bunds Calculate the cost of preferred stock based on the market return on the company's eating preferred stock 4. Calculate the cost of retained camnings using the approaches, CAPM, dividend growth and risk premium Reconcile the results into a single estimate Estimate the cost of equity raised through the sale of new stock using the dividend growth approach U . BTC 45% 9:23 PM FINB211 HW 4 5 Preferred Stock 5.0 Commons Equity 65.0 1000 Other information: Sunshine investments inc's marginal tax rate (state and federal) is 47% Flotate costs average 12% for common and preferred stock Short-term treasury bills currently yield 7.3% The market is returning 12.5% Sunshine Investments Ine's beta is 12 The firm is expected to grow at indefinitely The last annual dividend paid was $1.00 per share Sunshine investments Ine's expects to cam 5 million text year. The firm can borrow an additional 52 million al rates similar to the market return on its old debt. Beyond that lenders are expected to demand runs in the neighborhood of 14% Sunshine Investments inc's has the following capital budgeting projects under consideration in the coming year. These represent its investment opportunity schedule (IOS) Capital Crative Project IRR Required Cap Reg 15.0% SIM SUM B 14.0% S2M SSM C 13.0%S2M 57M D 12.0% 52M 59M E 11.0% 52M SIIM a. Calculate the firm's capital structure based on book and market values and compare with the target capital structure is the target structure a reasonable approximation of the market value based structure is the book structure very far off! b. Calculate the cost of debt based on the market return on the company's existing bonds Calculate the cost of preferred stock based on the market return on the company's existing preferred stock 4. Calculate the cost of retained carnings using the approaches CAPM. Gividend growth, and risk premium. Reconcile the results into a single estimate c. Estimate the cost of equity raised through the sale of new stock using the dividend growth 1. Calculate the WACC using equity from retained camnings based on your component cost estimates and the target capital structure Where is the first breakpoint in the MCC (the point where retained earnings runs out! Calculate to the nearest SIM h. Calculate the WACC atter the first breakpoint Where is the second breakpoint in the MCC (the point at which the cost of det increases) Why does this second becak exist? Calculate to the nearest S.IM. Calculate the WACC after the second break k What is the WACC for the planning period Suppose project is self-Fending in that it comes with a source of its own debt financing A loan is offered through an equipment manufacturer at 6%. The cost of the loan is 9% (1-1) 5.4% Should project be accepted under such conditions? (30 points)