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2. TRM Consulting Services currently has the following capital structure: Source Book Value Quantity Common Stock $ 25,000,000 1,250,000 Preferred Stock 5,000,000 100,000 Debt 8,600,000 8,600 New debt would mature on June 30, 2047, have a coupon rate of 6.5%, and would be sold for their par value of $1,000. The bonds pay interest semiannually, and flotation costs would be 2% of the selling price. The bonds would be issued on June 30, 2017. The preferred stock pays a $3 dividend annually and is currently valued at $64.30 per share. Flotation costs on preferred would be 4% of the price. The common stock, which can be bought for $32.00, has experienced a 6% annual growth rate in dividends and is expected to pay a $1.45 dividend next year. Flotation costs on new common equity would be 8%. The stock has a beta of 1.25, the risk-free rate is 3%, and the expected market risk premium is 6%. In addition, the firm expects to generate $150,000 of retained earnings. Assume that TRM's marginal tax rate is 35%. Set up a worksheet with all of the data from the problem in a well- organized input area. b. Calculate the book-value weights for each source of capital. Calculate the market-value weights for each source of capital. a. c. d. Calculate the component costs of capital (i.e., debt, preferred equity, retained earnings, and new common equity). Use the YIELD function (see page 292) when finding the after-tax cost of debt. Use the CAPM to find the cost of retained earnings, and the constant growth model for new common equity. Calculate the weighted average costs of capital using both the market- value and book-value weights with retained earnings and also new common equity. e. 3. Suppose that TRM Consulting Services has discussed its need for capital with its investment bankers. The bankers have estimated that TRM can raise new funds in the capital markets under the following conditions: After-Tax Cost Source Retained Earnings Common Equity 10.50% 10.93% 11.26% 11.85% Range Up to 150,000 Up to 1,000,000 1,000,001 to 3,000,000 More than 3,000,000 Up to 200,000 More than 200,000 Up to 1,000,000 1,000,001 to 2,000,000 More than 2,000,000 Preferred Equity 4.86% 6.25% Debt 4.33% 4.86% 5.12% a. Using the information from the previous problem, calculate each of the break-points, including the break-point due to retained earnings. Create a chart of TRM's marginal WACC curve using the market- value weights. Make sure that it is a perfect step function. b. 2. TRM Consulting Services currently has the following capital structure: Source Book Value Quantity Common Stock $ 25,000,000 1,250,000 Preferred Stock 5,000,000 100,000 Debt 8,600,000 8,600 New debt would mature on June 30, 2047, have a coupon rate of 6.5%, and would be sold for their par value of $1,000. The bonds pay interest semiannually, and flotation costs would be 2% of the selling price. The bonds would be issued on June 30, 2017. The preferred stock pays a $3 dividend annually and is currently valued at $64.30 per share. Flotation costs on preferred would be 4% of the price. The common stock, which can be bought for $32.00, has experienced a 6% annual growth rate in dividends and is expected to pay a $1.45 dividend next year. Flotation costs on new common equity would be 8%. The stock has a beta of 1.25, the risk-free rate is 3%, and the expected market risk premium is 6%. In addition, the firm expects to generate $150,000 of retained earnings. Assume that TRM's marginal tax rate is 35%. Set up a worksheet with all of the data from the problem in a well- organized input area. b. Calculate the book-value weights for each source of capital. Calculate the market-value weights for each source of capital. a. c. d. Calculate the component costs of capital (i.e., debt, preferred equity, retained earnings, and new common equity). Use the YIELD function (see page 292) when finding the after-tax cost of debt. Use the CAPM to find the cost of retained earnings, and the constant growth model for new common equity. Calculate the weighted average costs of capital using both the market- value and book-value weights with retained earnings and also new common equity. e. 3. Suppose that TRM Consulting Services has discussed its need for capital with its investment bankers. The bankers have estimated that TRM can raise new funds in the capital markets under the following conditions: After-Tax Cost Source Retained Earnings Common Equity 10.50% 10.93% 11.26% 11.85% Range Up to 150,000 Up to 1,000,000 1,000,001 to 3,000,000 More than 3,000,000 Up to 200,000 More than 200,000 Up to 1,000,000 1,000,001 to 2,000,000 More than 2,000,000 Preferred Equity 4.86% 6.25% Debt 4.33% 4.86% 5.12% a. Using the information from the previous problem, calculate each of the break-points, including the break-point due to retained earnings. Create a chart of TRM's marginal WACC curve using the market- value weights. Make sure that it is a perfect step function. b