SHOW WORK IS NOT NECESSARY
Q4
Sauer Milk Inc. wants to determine the minimum cost of capital point for the firm. Assume it is considering the following financial plans: Cost (aftertax) Weights Plan A Debt 6.6% 25% Preferred stock 12.6 15 Common equity 16.6 66 Plan B Debt 6.6% 35% Preferred stock 12.6 15 Common equity 17.6 56 Plan C Debt 7.6% 45% Preferred stock 19.7 15 Common equity 15.5 46 Plan D Debt 17.6% 55% Preferred stock 26.4 15 Common equity 17.6 36 a-1. Compute the weighted average cost for four plans. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.) Weighted Cost Plan A 96 HanB % Plan C 96 Keller COLISUCHOn IS Considering Two new ITIVESullenIS. Project E Calls 101 the purchase OI eduInlovinly equipITIeTIL. PIGjedin represents an investment in a hydraulic lift. Keller wishes to use a net present value profile in comparing the projects. The investment and cash flow patterns are as follows: Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods. Project E Project H ($32, 000 Investment) ($27, 000 Investment) Year Cash Flow Year Cash Flow AWNH $10, 000 $15, 000 13, 000 13, 000 14, 000 WNH 11, 000 16, 000 a. Determine the net present value of the projects based on a zero percent discount rate. Net Present Value Project E Project H b. Determine the net present value of the projects based on a discount rate of 9 percent. (Do not round intermediate calculations and round your answers to 2 decimal places.)The aftertax cost of debt is 7.50 percent, and the cost of common equity (in the form of retained earnings) is 14.50 percent; a. What is the firm's weighted average cost of capital? (Do not round intermediate calculations. input your answers as a percent rounded to 2 decimal places.) Weighted Cost Debt Common equity Weighted average cost of capital An outside consultant has suggested that because debt is cheaper than equity, the firm should switch to a capital structure that is 50 percent debt and 50 percent equity. Under this new and more debt-oriented arrangement, the aftertax cost of debt is 8.50 percent, and the cost of common equity (in the form of retained earnings) is 16.50 percent. b. Recalculate the flrm's weighted average cost of capital. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.) I Weighted Cost An outside consultant has suggested that because debt is cheaper than equity, the firm should switch to a capital structure that is 50 percent debt and 50 percent equity. Under this new and more debt-oriented arrangement, the aftertax cost of debt is 8.50 percent, and the cost of common equity (in the form of retained earnings) is 16.50 percent. b. Recalculate the firm's weighted average cost of capital. (Do not round intermediate calculations. input your answers as a percent rounded to 2 decimal places.) Weighted Cost Debt % Common equity Weighted average cost of capital 0.00 % firm has been informed by its investment banker that bonds of equal risk and credit rating are now selling to yield 13.4 percent. The common stock has a price of $58 and an expected dividend (01) of $5.30 per share. The flrm's historical growth rate of earnings and dividends per share has been 9.5 percent, but security analysts on Wall Street expect this growth to slow to 7 percent in future years. The preferred stock is selling at $54 per share and carries a dividend of $6.75 per share. The corporate tax rate is 25 percent. The flotation cost is 2.1 percent of the selling price for preferred stock. The optimum capital structure is 40 percent debt, 25 percent preferred stock, and 35 percent common equity in the form of retained earnings. a. Compute the cost of capital for the individual components in the capital structure. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.) Weighted Cost Debt % Preferred stock Common equity b. Calculate the weighted cost of each source of capital and the weighted average cost of capital. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.) Weighted Cost Debt % Preferred stock Common equity Weighted average cost of capital 0.00 %
