Long-Term Debt - Southeasterns long-term debt consists of 7.5 percent coupon, BBB-rated, semiannual payment bonds with 15 years remaining to maturity. The bonds recently traded at a price of $956.31 per $1,000 par value bond. Southeasterns financial plan calls for the issue of 30-year bonds to meet long-term debt needs. Equity - Southeasterns last dividend was $0.17, and its common stock now sells at a price of $5.25 per share. The company has 10 million common shares outstanding. - In the past few years, Southeastern has averaged a 20 percent return on equity and has paid out about 50 percent of its net income as dividends. - Southeasterns historical beta, as measure by several analysts who follow the stock, falls in the range of 1.3 to 1.5. Capital Structure - Southeasterns federal-plus-state tax rate is 40 percent. - Southeasterns target capital structure includes weights of 35 percent long-term debt and 65 percent common stock. Operating Divisions - About 60 percent of Southeasterns operating assets are used by the Healthcare Services division, and 40 percent by the Information Systems division. Managements best estimate of the Healthcare Services divisions beta is 1.0 and their best estimate for the Information Systems division is 2.0.

Exhibit 1

Balance Sheet (in millions)

Cash and marketable securities $2.5 Accounts Payable $1.1

Accounts receivable $5.9 Accruals $1.0

Inventory $1.3 Notes Payable $0.2

Current Assets $9.7 Current Liabilities $2.3

Net Fixed Assets $41.9 Long-Term Debt $20.0

Common Stock $29.3

Total Assets $51.6 Total Liabilities $51.6

Income Statement (in millions)

Net Revenues $80.6

Cash Expenses $71.8

Depreciation $2.8

Taxable Income $6.0

Taxes $2.4

Net Income $3.6

Dividends $1.8

Additions to Retained Earnings $1.8

Exhibit 2

Expected rate of return on the S&P 500 Index = 11%

Yield to maturity on A-rated long-term debt for a company with a beta of 1.0 = 7%

Exhibit 3

Average Long-Term Capital Structure

30 percent debt

70 percent equity

Average Cost of Debt

Interest rate A-rated tax-exempt bonds = 5.0%

Answers for highlighted boxes:

Tax rate				CCC
Weight of debt
Weight of equity
Final cost of debt estimate
Final cost of equity estimate