1. 
   

   Most recent annual common dividend                                          $4.00

   Today’s common stock price                                                         $50.00

   U.S. Treasury 10y annual rate                                                        3 percent

   Market risk premium                                                                       5 percent

   Equity Risk Premium on Bond Yield                                             10 percent

   Number of common shares outstanding                                       2.5 million

   Today’s preferred stock price                                                        $100.00

   Fixed preferred dividend                                                                 $8.00

   Constant growth rate                                                                       6 percent

   Beta β                                                                                              2.0

   Floatation costs for Preferred stock issuance                                 7 percent

   Market price of the bond                                                               $1,100.00

   Annual coupon on the bond                                                           $70.00

   Years to bond maturity                                                                    5 years

   Par value bond                                                                              $1,000

   Number of preferred shares outstanding                                      200,000

   Number of bonds outstanding                                                        200,000

   Income Statement (amounts in millions)

                                 Sales                                                                                  $200,000

                                 Variable operating costs (60% of sales)                            (120,000)

                                 Gross profit                                                                           80,000

                                 Fixed operating costs                                                           (40,000)

                                 Net operating income (EBIT)                                                40,000

                                 Interest expense                                                                   (10,000)

                                 Taxable income                                                                      30,000

                                 Taxes                                                                                     (12,000)

                                 Net income                                                                            $18,000

   Company can raise more debt by selling 50,000 new bonds at the same rate (interest) and receiving the market price of the bond i.e. $1,100. The outstanding 200,000 bonds and the additional 50,000 is the maximum the company can raise in debt. After this amount, the average after tax cost of debt will be increased by 1 percent.

   In the upcoming annual financial results, the company expects to generate 75 million dollars in retained earnings for the capital budgeting projects. Any requirement of funds beyond this would require issuance of new stock at the market price of $50 per share while maintaining the existing capital structure.

   Company has following projects for consideration

   Projects                     Investment                           Expected MIRR

   A                                 $50 million                           13 percent

   B                                 $60 million                           10 percent

   C                                  $100 million                         8 percent

   D                                 $10 million                           7.5 percent

   1. What is the amount of the next dividend?

2.  

   2. The company’s amount of current debt is:

3.  

   3. The company’s cost of preferred stock in percentage is:

4.  

   4. What is the proportion of debt to the overall capital?

5.  

   5. The rate of return on company’s equity using the Dividend Discount Model is:

6.  

   6. The cost of debt at the current market price is:

7.  

   7. What is the after tax cost of debt?

8.  

   8. The effective tax rate for the company is:

9.  

   9. The amount of capital provided by preferred equity owners is:

10.  

    10. The weight of preferred equity in the company’s capital structure is:

11.  

    11. What is the amount of total equity capital provided by common shareholders?

12.  

    12. What is the common stock proportion in the company’s total capital?

13.  

    13. The cost of common equity using the Capital Asset Pricing Model is:

14.  

    14. The Bond Plus Yield Method would result in the following rate of return:

15.  

    15. What is the equity risk premium calculated by the Capital Asset Pricing Model?

16.  

    16. At what level is the first break point in capital structure caused by Debt?

17.  

    17. What is average cost of company’s common equity?

18.  

    18. What is the Weighted Average Cost of Capital?

19.  

    19. If the projects’ given estimated MIRR turns to be true, then which projects can be taken:
20. 
    
    1. without raising any more capital?
    2. without raising any equity capital?
    3. Without raising any debt capital?