Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Please complete E and F. Thanks 2. [10 points] Burton currently has $850,000 of long-term debt outstanding, 5,000 shares of preferred stock ($10 par) with

image text in transcribedPlease complete E and F. Thanks

2. [10 points] Burton currently has $850,000 of long-term debt outstanding, 5,000 shares of preferred stock ($10 par) with a market price of $13, and 20,000 shares of common stock ($20 par) with a market price of $54 per share. They have used a WACC of 14% in the past to evaluate projects but want to determine their current required return for new investments. Debt: Burton can sell a 10-year, $1,000 par value, 8 percent annual coupon (interest paid semi- annually) bond for $980. A flotation cost of 2 percent of the face (par) value would be required. Additionally, the firm has a marginal tax rate of 21%. Preferred Stock: Burton pays $1.25 dividends annually on their preferred shares. The shares are currently selling for $13 in the secondary market. They do not have plans to issue any additional preferred stock. Common Stock: Burton's common stock is currently selling for $54 per share. The dividend expected to be paid at the end of the coming year is $4. Its dividend payments have been growing at a constant 4% rate. a. Calculate the after-tax cost of debt $344.74 b. Calculate the cost of preferred equity 9.61% C. Calculate the cost of common equity 4.07% d. Calculate the WACC 3.3097% e. Re-calculate the NPV for their project in #1 above using this new WACC. f. Should Burton accept the project when considering this revised cost of capital? Why or why not? 2. [10 points] Burton currently has $850,000 of long-term debt outstanding, 5,000 shares of preferred stock ($10 par) with a market price of $13, and 20,000 shares of common stock ($20 par) with a market price of $54 per share. They have used a WACC of 14% in the past to evaluate projects but want to determine their current required return for new investments. Debt: Burton can sell a 10-year, $1,000 par value, 8 percent annual coupon (interest paid semi- annually) bond for $980. A flotation cost of 2 percent of the face (par) value would be required. Additionally, the firm has a marginal tax rate of 21%. Preferred Stock: Burton pays $1.25 dividends annually on their preferred shares. The shares are currently selling for $13 in the secondary market. They do not have plans to issue any additional preferred stock. Common Stock: Burton's common stock is currently selling for $54 per share. The dividend expected to be paid at the end of the coming year is $4. Its dividend payments have been growing at a constant 4% rate. a. Calculate the after-tax cost of debt $344.74 b. Calculate the cost of preferred equity 9.61% C. Calculate the cost of common equity 4.07% d. Calculate the WACC 3.3097% e. Re-calculate the NPV for their project in #1 above using this new WACC. f. Should Burton accept the project when considering this revised cost of capital? Why or why not

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Health Care Finance Basic Tools For Nonfinancial Managers

Authors: Judith Baker

2nd Edition

0763726605, 9780763726607

More Books

Students also viewed these Finance questions

Question

=+d) Interpret the coefficient of the dummy variable named Q3.

Answered: 1 week ago