Question No. 2. (20) a. Equipment Company has earnings before interest and taxes (EBIT) of $10 million. The company currently has outstanding debt of $20 million at a cost of 7 percent. Ignore taxes. (a) Using the net income (NI) approach and a cost of equity of 12.5 percent; (1) compute the total value of the firm and the firm's overall weighted average cost of capital (ko), and (2) determine the firm's market debt/equity ratio. (b) Assume that the firm issues an additional $10 million in debt and uses the proceeds to retire stock; the interest rate and the cost of equity remain the same. (1) Compute the new total value of the firm and the firm's overall cost of capital, and (2) determine the firm's market debt/equity ratio. b. The EBIT-EPS Analysis. Parker Brothers, Inc., is considering three financing plans. The key information is as follows: (Assume a 50 percent tax rate). Plan A Plan B Plan C Common stock: $200,000 Bonds at 8%: $100,000 Preferred stock at 8%: $100,000 Common stock: $100,000 Common stock: $100,000 Question No. 3. (20) The Fazal Steel Corporation has the following capital structure, which it considers optimal: Bond, 7% (Now selling at par) $300,000 Preferred stock, $5.00 240,000 Common stock 360,000 $900,000 Dividends on common stock are currently $3 per share and are expected to grow at a constant rate of 6 percent. Market price share of common stock is $40, and the preferred stock is selling at $50. Flotation cost on new issues of common stock is 10 percent. The interest on bonds is paid annually. The company's tax rate is 40 percent. Calculate: (a) the cost of bonds; (b) the cost of preferred stock; (c) the cost of new common stock (or external equity); and (d) the weighted average cost of capital. Question No. 2. (20) a. Equipment Company has earnings before interest and taxes (EBIT) of $10 million. The company currently has outstanding debt of $20 million at a cost of 7 percent. Ignore taxes. (a) Using the net income (NI) approach and a cost of equity of 12.5 percent; (1) compute the total value of the firm and the firm's overall weighted average cost of capital (ko), and (2) determine the firm's market debt/equity ratio. (b) Assume that the firm issues an additional $10 million in debt and uses the proceeds to retire stock; the interest rate and the cost of equity remain the same. (1) Compute the new total value of the firm and the firm's overall cost of capital, and (2) determine the firm's market debt/equity ratio. b. The EBIT-EPS Analysis. Parker Brothers, Inc., is considering three financing plans. The key information is as follows: (Assume a 50 percent tax rate). Plan A Plan B Plan C Common stock: $200,000 Bonds at 8%: $100,000 Preferred stock at 8%: $100,000 Common stock: $100,000 Common stock: $100,000 Question No. 2. (20) a. Equipment Company has earnings before interest and taxes (EBIT) of $10 million. The company currently has outstanding debt of $20 million at a cost of 7 percent. Ignore taxes. (a) Using the net income (NI) approach and a cost of equity of 12.5 percent; (1) compute the total value of the firm and the firm's overall weighted average cost of capital (ko), and (2) determine the firm's market debt/equity ratio. (b) Assume that the firm issues an additional $10 million in debt and uses the proceeds to retire stock; the interest rate and the cost of equity remain the same. (1) Compute the new total value of the firm and the firm's overall cost of capital, and (2) determine the firm's market debt/equity ratio. b. The EBIT-EPS Analysis. Parker Brothers, Inc., is considering three financing plans. The key information is as follows: (Assume a 50 percent tax rate). Plan A Plan B Plan C Common stock: $200,000 Bonds at 8%: $100,000 Preferred stock at 8%: $100,000 Common stock: $100,000 Common stock: $100,000 Question No. 3. (20) The Fazal Steel Corporation has the following capital structure, which it considers optimal: Bond, 7% (Now selling at par) $300,000 Preferred stock, $5.00 240,000 Common stock 360,000 $900,000 Dividends on common stock are currently $3 per share and are expected to grow at a constant rate of 6 percent. Market price share of common stock is $40, and the preferred stock is selling at $50. Flotation cost on new issues of common stock is 10 percent. The interest on bonds is paid annually. The company's tax rate is 40 percent. Calculate: (a) the cost of bonds; (b) the cost of preferred stock; (c) the cost of new common stock (or external equity); and (d) the weighted average cost of capital. Question No. 2. (20) a. Equipment Company has earnings before interest and taxes (EBIT) of $10 million. The company currently has outstanding debt of $20 million at a cost of 7 percent. Ignore taxes. (a) Using the net income (NI) approach and a cost of equity of 12.5 percent; (1) compute the total value of the firm and the firm's overall weighted average cost of capital (ko), and (2) determine the firm's market debt/equity ratio. (b) Assume that the firm issues an additional $10 million in debt and uses the proceeds to retire stock; the interest rate and the cost of equity remain the same. (1) Compute the new total value of the firm and the firm's overall cost of capital, and (2) determine the firm's market debt/equity ratio. b. The EBIT-EPS Analysis. Parker Brothers, Inc., is considering three financing plans. The key information is as follows: (Assume a 50 percent tax rate). Plan A Plan B Plan C Common stock: $200,000 Bonds at 8%: $100,000 Preferred stock at 8%: $100,000 Common stock: $100,000 Common stock: $100,000