.ill AT&T 7:43 AM 100% Case 5.pdf 1) Telecommunications Services' long-term debt consists of 13 percent coupon, semiannual payment bonds with 15 years remaining to maturity. The bonds last traded at a price of 1,230.58 per $1,000 par value bond. The bonds are not callable, and they are rated BBB. (2) The founders have an aversion to short-term debt, so Telecommunications Services uses such debt only to fund cyclical working capital needs. (3) Telecommunications Services' federal-plus-state tax rate is 40 percent 4) The company's preferred stock pays a dividend of $2.50 per quarter it has a par value of $100 it is noncallable and perpetual: and it is traded in the over-the-counter market at a cur rent price of $113.10 per share. A flotation cost of $2.00 per share would be required on a new issue of preferred. ) The fim's last dividend (D0) was $1.73, and dividends are expected to grow at about a 10 percent rate in the foreseeable future. Some analysts expect the company's recent growth rate Copyright O 1904 South-Westem. All rights reserved Case 5-Directed Cost of Capital to continue, others expect it to go to zero as new competition enters the market; the majority anticipate that a growth rate of about 10 percent will continue indefinitely. Telecommunica- tions Services' common stock now sells at a price of about $50 per share. The company has 7.5 million common shares outstanding 6) The current yield on long-term T-bonds is 7 percent, and a prominent investment banking firm has recently estimated that the marken risk premium is 6 percentage points over Treasury bonds. The firm's historical beta, as measured by several analysts who follow the stock, is 1.2 7) The required rate of return on an average (A taled) company's long-term delt is 9 percent (8) Telecommunications Services is forecasting retained earnings of $5,400000 and recia. tion of $13,500,000 for the coming year Telecommunications Services' investment bankers believe that a new common stock issue would involve total flotation costs including underwriting costs, market pressure from increased supply, and market pressure from negative signaling effects of 30 percent (9) 10) The market value target capital structure calls for 30 percent long-term debl 10 percent pre- ferred stock, and 60 percent common stock. Now assume that you were recently hired as Will Shire's assistant, and he has given you the task of helping him develop a cost of capital. You will also have to meet with Bruce Holden and, possibly, with the president and the full board of directors (including the Texas finance professor) to answer any questions they might have 5 Open With Print