please use the excel to answer all the part of the questions
E2) Carpetto Technologies is looking to estimate its cost of capital for capital budgeting purposes. Their in-house capital budgeting division has gathered the following information for this purpose: Carpetto currently has 25 year, $1000 par bonds, trading at a price of $967.37. These bonds pay a coupon of 6.8 % per year annually. If the firm issues new bonds, it will incur flotation costs of 3% on the bonds. Carpetto's 8.75% annual dividend paying, $100 par preferred stock currently sell in the market at a price of $97 per share. Carpetto will incur a flotation cost of 5% if it issued new preferred stock. Carpetto's common stock sells for $61 per share, its last dividend of $2 which it paid yesterday is expected to grow at a constant rate of 7% per year into the future. New common stock will additionally impose flotation costs of 8% on the firm. Carpetto's beta is 1.6. The firm has estimated the risk-free rate to be 4%, and the market risk premium to be 3.8%. The firm's target capital structiire is 25% debt, 15 % preferred stock, and equity. Carpetto has estimated that they will earn about $18 million in net income this year, of which they expect to payout 35 % as dividends. The firm's marginal tax rate is 34 %. 60% common Estimate Carpetto's WACC before and after it exhausts all its retained earnings. How much retained earnings does Carpetto have available this year for reinvestment? What is the firm's retained earnings breakpoint? a) b) c) al after-tax cost of debt before-tax cost of debt * (1 - tax rate) before-tax cost of debt is the YTM of the bonds. YTM is calculated using RATE function in Excel with these inputs mper 25 (25 years to maturity) pmt 1000 6.8% (annual coupon payment face value annual coupon rate. This is a positive figure as it is an inflow to the bondholder) pv -967.37 (-3%) (proceeds of new bond issue current bond price * (1 - flotation cost). This is a negative figure as it is an outflow to the buyer of the bond) fv 1000 maturity. This is a positive figure as it is an inflow to the bondholder) the RATE is calculated to be 7.35%. This is the YTM after-tax cost of debt = before-tax cost of debt * (1- tax rate) after-tax cost of debt = 7.35%* (1 - 34%) ==> 4.85% cost of preferred stock net proceeds per share current share price* (1 flotation cost) $97 * (1-5%) S92.15 cost of preferred stock 9.50% cl cost of equity (Gordon model) (next year dividend / current share price) + constant growth rate cost of equity (Gordon model) ((S2* 1.07)/ S31)+0.07 13.90% cost of equity (CAPM) = risk free rate + (beta market risk premium) cost of equity (CAPM) 4% +(1.6*3.8%) average cost (13.90% + 10.08% ) /2 = 11.99% d cost of external equity = cost of internal equity / (1 flotation cost) cost of external equity 11.99% / (1 - 8%) = (face value of the bond receivable on dividendet proceeds per share ($100 8.75%) / $92.15 = =>10.08 % 13.03% E2) Carpetto Technologies is looking to estimate its cost of capital for capital budgeting purposes. Their in-house capital budgeting division has gathered the following information for this purpose: Carpetto currently has 25 year, $1000 par bonds, trading at a price of $967.37. These bonds pay a coupon of 6.8 % per year annually. If the firm issues new bonds, it will incur flotation costs of 3% on the bonds. Carpetto's 8.75% annual dividend paying, $100 par preferred stock currently sell in the market at a price of $97 per share. Carpetto will incur a flotation cost of 5% if it issued new preferred stock. Carpetto's common stock sells for $61 per share, its last dividend of $2 which it paid yesterday is expected to grow at a constant rate of 7% per year into the future. New common stock will additionally impose flotation costs of 8% on the firm. Carpetto's beta is 1.6. The firm has estimated the risk-free rate to be 4%, and the market risk premium to be 3.8%. The firm's target capital structiire is 25% debt, 15 % preferred stock, and equity. Carpetto has estimated that they will earn about $18 million in net income this year, of which they expect to payout 35 % as dividends. The firm's marginal tax rate is 34 %. 60% common Estimate Carpetto's WACC before and after it exhausts all its retained earnings. How much retained earnings does Carpetto have available this year for reinvestment? What is the firm's retained earnings breakpoint? a) b) c) al after-tax cost of debt before-tax cost of debt * (1 - tax rate) before-tax cost of debt is the YTM of the bonds. YTM is calculated using RATE function in Excel with these inputs mper 25 (25 years to maturity) pmt 1000 6.8% (annual coupon payment face value annual coupon rate. This is a positive figure as it is an inflow to the bondholder) pv -967.37 (-3%) (proceeds of new bond issue current bond price * (1 - flotation cost). This is a negative figure as it is an outflow to the buyer of the bond) fv 1000 maturity. This is a positive figure as it is an inflow to the bondholder) the RATE is calculated to be 7.35%. This is the YTM after-tax cost of debt = before-tax cost of debt * (1- tax rate) after-tax cost of debt = 7.35%* (1 - 34%) ==> 4.85% cost of preferred stock net proceeds per share current share price* (1 flotation cost) $97 * (1-5%) S92.15 cost of preferred stock 9.50% cl cost of equity (Gordon model) (next year dividend / current share price) + constant growth rate cost of equity (Gordon model) ((S2* 1.07)/ S31)+0.07 13.90% cost of equity (CAPM) = risk free rate + (beta market risk premium) cost of equity (CAPM) 4% +(1.6*3.8%) average cost (13.90% + 10.08% ) /2 = 11.99% d cost of external equity = cost of internal equity / (1 flotation cost) cost of external equity 11.99% / (1 - 8%) = (face value of the bond receivable on dividendet proceeds per share ($100 8.75%) / $92.15 = =>10.08 % 13.03%
