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Chapter 11

1.

Emma Inc.s capital structure consists of 30 percent debt and 70 percent common equity. According to its investment banker, Emma Inc. can issue up to $240,000 new debt at a 3.8 percent cost; for any amount of new debt greater than $240,000, the cost is 5.5 percent. Emma Inc. expects to generate $560,000 in retained earnings this year. Compute the WAC breakpoint(s) associated with raising new funds.

2.

Tiger Inc. needs to raise $85,000 to purchase a new machine. Tiger knows its component costs of capital are Debt 5%, Preferred Stock 7%, New Equity13%, and Retained Earnings 11% . Tiger maintains a capital structure that consists of 60 percent debt, 10 percent preferred stock, and 30 percent common equity. The firms marginal tax rate is 30 percent. If Tiger expects to generate $26,000 in retained earnings this year, what marginal cost of capital will it incur to raise the needed funds if needed? (HINT)

3.

Jackson Inc. is evaluating two independent investments. Project S costs $150,000 and has an IRR equal to 12 percent, and Project L costs $140,000 and has an IRR equal to 10 percent. Jacksons capital structure consists of 20 percent debt and 80 percent common equity, and its component costs of capital are Debt 4%, New Equity 12.5%, Retained Earnings 10% . If Jackson Inc expects to generate $230,000 in retained earnings this year, which project(s) should be purchased?

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4.

Buddy Inc. has $6 million in assets, $700,000 EBIT, 80,000 shares of stock outstanding, and a marginal tax rate equal to 40 percent. If Buddys debt-to-total-assets ratio (D/TA) is 70 percent, it pays 12 percent interest on debt, whereas if the D/TA ratio is 40 percent, interest is 9 percent. Calculate Buddys EPS and ROE for each capital structure. Which capital structure is better? Why?

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5.

Rosie Mfg. earned $100,000 this year. The company follows the residual dividend policy when paying dividends. Rosie has determined that it needs a total of $120,000 for investment in capital budgeting projects this year. If the companys debt-to-asset ratio is 50 percent, what will its dividend payout ratio be this year?

6.

Last year, the McKenna Artists retained $100,000 of the $250,000 net income it generated. This year, McKenna Artists generated net income equal to $275,000. If Mc Kenna Artists follows the constant dividend payout ratio dividend policy, how much should be paid in dividends this year?

7.

James Patrick Co. recently declared a 10 percent stock dividend. Prior to the stock dividend, the equity section on James Patrick Co.s balance sheet was:

Common stock (12,000 shares outstanding, $2 par value)	$24,000
Additional paid-in capital	16,000
Retained earnings	10,000
Total common shareholders equity	$50,000

James Patrick Co.s stock currently sells for $5 per share. Show what the equity section of the balance sheet will look like after the stock dividend is initiated.