Question 1 Lowe Corp has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The firm's tax rate is 40%. Debt: The firm can sell for $1,000,10-year, $1,000-par-value bond paying annual interest at 9% coupon rate. The number of bonds outstanding is 1 million. Common stock: The firm's common stock is currently selling for $50 per share. The number of stocks issued is 60 million. We also observe the history of company dividends. a. Compute the after-tax cost of debt. b.\%Estimate the company's dividend growth rate c. Compute the cost of common stock. d.\%Compute the WACC for Felix Corp. e. Discuss the impact of rising or falling interest rates on the company's borrowing costs and the overall WACC calculation. f. Discuss the relationship between credit ratings and the cost of debt, considering the impact of upgrades or downgrades on borrowing costs and the resulting implications for the WACC. Question 2 Unique Corp Ltd is a manufacturer of smart phone. John, the CEO of Unique Corp, has been aware of an acquisition opportunity in the market. The target firm manufactures smart phone processors. John is seeking your advice on this issue. a. John is now considering purchasing the shares of target firm. The target firm just paid $0.25 dividend. The market expects that the firm's dividend will grow at 6% per year. The fair rate of return of the company's shares is 18%. Compute the fair price of target firm's share. b. To finance the potential acquisition, Unique Corp has to issue bonds for additional capital. The details of the bonds to be issued are as follow: Face value of bond =$1,000 Coupon rate =9% with annual coupon Time to maturity =10 years Currently, the yield to maturity of the company's bond is 8% If the company wants to raise $10 million by issuing bonds, compute the number of bonds required. c. Explain the effect of the following events to the current share price of the target firm in detail according to the theories and concepts discussed in the lectures: 1. Investors are becoming more risk adverse because of the current financial crisis, when all other things being equal. 2. The company announces that a new product is now under development, and the development project will be financed by internal resource, It is expected that the company's earnings will be boosted significantly if the project is successful. Question 1 Lowe Corp has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The firm's tax rate is 40%. Debt: The firm can sell for $1,000,10-year, $1,000-par-value bond paying annual interest at 9% coupon rate. The number of bonds outstanding is 1 million. Common stock: The firm's common stock is currently selling for $50 per share. The number of stocks issued is 60 million. We also observe the history of company dividends. a. Compute the after-tax cost of debt. b.\%Estimate the company's dividend growth rate c. Compute the cost of common stock. d.\%Compute the WACC for Felix Corp. e. Discuss the impact of rising or falling interest rates on the company's borrowing costs and the overall WACC calculation. f. Discuss the relationship between credit ratings and the cost of debt, considering the impact of upgrades or downgrades on borrowing costs and the resulting implications for the WACC. Question 2 Unique Corp Ltd is a manufacturer of smart phone. John, the CEO of Unique Corp, has been aware of an acquisition opportunity in the market. The target firm manufactures smart phone processors. John is seeking your advice on this issue. a. John is now considering purchasing the shares of target firm. The target firm just paid $0.25 dividend. The market expects that the firm's dividend will grow at 6% per year. The fair rate of return of the company's shares is 18%. Compute the fair price of target firm's share. b. To finance the potential acquisition, Unique Corp has to issue bonds for additional capital. The details of the bonds to be issued are as follow: Face value of bond =$1,000 Coupon rate =9% with annual coupon Time to maturity =10 years Currently, the yield to maturity of the company's bond is 8% If the company wants to raise $10 million by issuing bonds, compute the number of bonds required. c. Explain the effect of the following events to the current share price of the target firm in detail according to the theories and concepts discussed in the lectures: 1. Investors are becoming more risk adverse because of the current financial crisis, when all other things being equal. 2. The company announces that a new product is now under development, and the development project will be financed by internal resource, It is expected that the company's earnings will be boosted significantly if the project is successful
