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Business has been good for Keystone Control Systems, as indicated by the eleven-year growth in earnings per share. The earnings have grown from $1.00 to $2.58. a. Determine the compound annual rate of growth in earnings (n = 11). Note: Do not round Intermediate calculations. Input your answer as a percent rounded to 2 decimal places. Compound annual rate of growth % b. Based on the growth rate determined in part a, project earnings for next year (E1). Note: Do not round Intermediate calculations. Round your answer to 2 decimal places. E₁₁ c. Assume the dividend payout ratio is 35 percent. Compute D₁. Note: Do not round Intermediate calculations. Round your answer to 2 decimal places. d. The current price of the stock is $21. Using the growth rate (g) from part a and (D₁) from part c, compute Ke- Note: Do not round Intermediate calculations. Input your answer as a percent rounded to 2 decimal places. % e. If the flotation cost is $3.00, compute the cost of new common stock (K) using growth rate (g) from part a and dividend (D1) from part c. Note: Do not round Intermediate calculations. Input your answer as a percent rounded to 2 decimal places. Kn % What is the present value of the following? Use Appendix B as an approximate answer, but calculate your final answer using the formula and financial calculator methods. a. $8,000 in 13 years at 8 percent? Note: Do not round Intermediate calculations. Round your final answer to 2 decimal places. Present value 2,940.87 b. $18,000 in 7 years at 9 percent? Note: Do not round Intermediate calculations. Round your final answer to 2 decimal places. Present value c. $27,800 in 18 years at 10 percent? Note: Do not round Intermediate calculations. Round your final answer to 2 decimal places. Present value a. What is the present value of $280,000 to be received after 40 years with a 16 percent discount rate? Use Appendix B as an approximate answer, but calculate your final answer using the formula and financial calculator methods. Note: Do not round Intermediate calculations. Round your final answer to 2 decimal places. Present value Answer is not complete. b. Would the present value of the funds in part a be enough to buy a $800 concert ticket? Ⓒ No Yes You will receive $8,500 three years from now. The discount rate is 10 percent. a. What is the value of your investment two years from now? Multiply $8,500 × (1/1.10) or divide by 1.10 (one year's discount rate at 10 percent). Note: Do not round Intermediate calculations. Round your answer to 2 decimal places. Value of investment b. What is the value of your investment one year from now? Multiply your answer to part a by (1/1.10). Note: Do not round Intermediate calculations. Round your answer to 2 decimal places. Value of investment c. What is the value of your investment today? Multiply your answer to part b by (1/1.10). Note: Do not round Intermediate calculations. Round your answer to 2 decimal places. Value of investment d. Use the formula PV = FV × (1/(1+") to find the present value of $8,300 received three years from now at 10 percent interest. Note: Do not round Intermediate calculations. Round your answer to 2 decimal places. Present value A brilliant young scientist is killed in a plane crash. It is anticipated that he could have earned $390,000 a year for the next 20 years. The attorney for the plaintiff's estate argues that the lost income should be discounted back to the present at 7 percent. The lawyer for the defendant's insurance company argues for a discount rate of 13 percent. What is the difference between the present value of the settlement at 7 percent and 13 percent? Compute each one separately. Use Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. Note: Do not round Intermediate calculations. Round your answers to 2 decimal places. PV at 7% rate PV at 13% rate Difference Present Value $ 0.00 The treasurer of Riley Coal Company is asked to compute the cost of fixed income securities for her corporation. Even before making the calculations, she assumes the aftertax cost of debt is at least 2 percent less than that for preferred stock. Debt can be issued at a yield of 11.4 percent, and the corporate tax rate is 30 percent. Preferred stock will be priced at $63 and pay a dividend of $5.50. The flotation cost on the preferred stock is $8. a. Compute the aftertax cost of debt. Note: Do not round Intermediate calculations. Input your answer as a percent rounded to 2 decimal places. Aftertax cost of debt 7.98 % b. Compute the aftertax cost of preferred stock. Note: Do not round Intermediate calculations. Input your answer as a percent rounded to 2 decimal places. Aftertax cost of preferred stock % c. Based on the facts given above, is the treasurer correct? Yes, the treasurer is correct. O No, the treasurer is incorrect. Brook's Window Shields Incorporated is trying to calculate its cost of capital for use in a capital budgeting decision. Mr. Glass, the vice president of finance, has given you the following information and has asked you to compute the weighted average cost of capital. The company currently has outstanding a bond with a 10.2 percent coupon rate and another bond with a 7.5 percent coupon rate. The firm has been informed by its investment banker that bonds of equal risk and credit rating are now selling to yield 11.4 percent. The common stock has a price of $54 and an expected dividend (D₁) of $5.70 per share. The firm's historical growth rate of earnings and dividends per share has been 7.5 percent, but security analysts on Wall Street expect this growth to slow to 5 percent in future years. The preferred stock is selling at $50 per share and carries a dividend of $4.75 per share. The corporate tax rate is 40 percent. The flotation cost is 2.5 percent of the selling price for preferred stock. The optimum capital structure is 30 percent debt, 10 percent preferred stock, and 60 percent common equity in the form of retained earnings. a. Compute the cost of capital for the individual components in the capital structure. Note: Do not round Intermediate calculations. Input your answers as a percent rounded to 2 decimal places. Weighted Cost % Debt Preferred stock Common equity b. Calculate the weighted cost of each source of capital and the weighted average cost of capital. Note: Do not round Intermediate calculations. Input your answers as a percent rounded to 2 decimal places. Debt Preferred stock Common equity Weighted Cost 96 Weighted average cost of capital 0.00 % Business has been good for Keystone Control Systems, as indicated by the eleven-year growth in earnings per share. The earnings have grown from $1.00 to $2.58. a. Determine the compound annual rate of growth in earnings (n = 11). Note: Do not round Intermediate calculations. Input your answer as a percent rounded to 2 decimal places. Compound annual rate of growth % b. Based on the growth rate determined in part a, project earnings for next year (E1). Note: Do not round Intermediate calculations. Round your answer to 2 decimal places. E₁₁ c. Assume the dividend payout ratio is 35 percent. Compute D₁. Note: Do not round Intermediate calculations. Round your answer to 2 decimal places. d. The current price of the stock is $21. Using the growth rate (g) from part a and (D₁) from part c, compute Ke- Note: Do not round Intermediate calculations. Input your answer as a percent rounded to 2 decimal places. % e. If the flotation cost is $3.00, compute the cost of new common stock (K) using growth rate (g) from part a and dividend (D1) from part c. Note: Do not round Intermediate calculations. Input your answer as a percent rounded to 2 decimal places. Kn % What is the present value of the following? Use Appendix B as an approximate answer, but calculate your final answer using the formula and financial calculator methods. a. $8,000 in 13 years at 8 percent? Note: Do not round Intermediate calculations. Round your final answer to 2 decimal places. Present value 2,940.87 b. $18,000 in 7 years at 9 percent? Note: Do not round Intermediate calculations. Round your final answer to 2 decimal places. Present value c. $27,800 in 18 years at 10 percent? Note: Do not round Intermediate calculations. Round your final answer to 2 decimal places. Present value a. What is the present value of $280,000 to be received after 40 years with a 16 percent discount rate? Use Appendix B as an approximate answer, but calculate your final answer using the formula and financial calculator methods. Note: Do not round Intermediate calculations. Round your final answer to 2 decimal places. Present value Answer is not complete. b. Would the present value of the funds in part a be enough to buy a $800 concert ticket? Ⓒ No Yes You will receive $8,500 three years from now. The discount rate is 10 percent. a. What is the value of your investment two years from now? Multiply $8,500 × (1/1.10) or divide by 1.10 (one year's discount rate at 10 percent). Note: Do not round Intermediate calculations. Round your answer to 2 decimal places. Value of investment b. What is the value of your investment one year from now? Multiply your answer to part a by (1/1.10). Note: Do not round Intermediate calculations. Round your answer to 2 decimal places. Value of investment c. What is the value of your investment today? Multiply your answer to part b by (1/1.10). Note: Do not round Intermediate calculations. Round your answer to 2 decimal places. Value of investment d. Use the formula PV = FV × (1/(1+") to find the present value of $8,300 received three years from now at 10 percent interest. Note: Do not round Intermediate calculations. Round your answer to 2 decimal places. Present value A brilliant young scientist is killed in a plane crash. It is anticipated that he could have earned $390,000 a year for the next 20 years. The attorney for the plaintiff's estate argues that the lost income should be discounted back to the present at 7 percent. The lawyer for the defendant's insurance company argues for a discount rate of 13 percent. What is the difference between the present value of the settlement at 7 percent and 13 percent? Compute each one separately. Use Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. Note: Do not round Intermediate calculations. Round your answers to 2 decimal places. PV at 7% rate PV at 13% rate Difference Present Value $ 0.00 The treasurer of Riley Coal Company is asked to compute the cost of fixed income securities for her corporation. Even before making the calculations, she assumes the aftertax cost of debt is at least 2 percent less than that for preferred stock. Debt can be issued at a yield of 11.4 percent, and the corporate tax rate is 30 percent. Preferred stock will be priced at $63 and pay a dividend of $5.50. The flotation cost on the preferred stock is $8. a. Compute the aftertax cost of debt. Note: Do not round Intermediate calculations. Input your answer as a percent rounded to 2 decimal places. Aftertax cost of debt 7.98 % b. Compute the aftertax cost of preferred stock. Note: Do not round Intermediate calculations. Input your answer as a percent rounded to 2 decimal places. Aftertax cost of preferred stock % c. Based on the facts given above, is the treasurer correct? Yes, the treasurer is correct. O No, the treasurer is incorrect. Brook's Window Shields Incorporated is trying to calculate its cost of capital for use in a capital budgeting decision. Mr. Glass, the vice president of finance, has given you the following information and has asked you to compute the weighted average cost of capital. The company currently has outstanding a bond with a 10.2 percent coupon rate and another bond with a 7.5 percent coupon rate. The firm has been informed by its investment banker that bonds of equal risk and credit rating are now selling to yield 11.4 percent. The common stock has a price of $54 and an expected dividend (D₁) of $5.70 per share. The firm's historical growth rate of earnings and dividends per share has been 7.5 percent, but security analysts on Wall Street expect this growth to slow to 5 percent in future years. The preferred stock is selling at $50 per share and carries a dividend of $4.75 per share. The corporate tax rate is 40 percent. The flotation cost is 2.5 percent of the selling price for preferred stock. The optimum capital structure is 30 percent debt, 10 percent preferred stock, and 60 percent common equity in the form of retained earnings. a. Compute the cost of capital for the individual components in the capital structure. Note: Do not round Intermediate calculations. Input your answers as a percent rounded to 2 decimal places. Weighted Cost % Debt Preferred stock Common equity b. Calculate the weighted cost of each source of capital and the weighted average cost of capital. Note: Do not round Intermediate calculations. Input your answers as a percent rounded to 2 decimal places. Debt Preferred stock Common equity Weighted Cost 96 Weighted average cost of capital 0.00 %
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Related Book For
Foundations of Financial Management
ISBN: 978-1259194078
15th edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen
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