Sir for the question 1.2 in the attachment,I got the following answer.

cost of debt=8.5 %

Cost of equity= 8.2 %

WACC =6.96% Is it right

Financial Management - MBA ZG 521 Assignment - II (October 2016) Total pages: 3 Number of questions: 10 1. Cost of capital 1.1. Thomas Communications (TC) has the following capital structure, which it considers to be optimal: debt = 25%, preferred stock = 15%, and common stock - 60%. TC's tax rate is 40% and investors expect earnings and dividends to grow at a constant rate of 9% in the future. TC paid a dividend of $3.60 per share last year (D0), and its stock currently sells at a price of $60 per share. Treasury bonds yield 11%; an average stock has 14% expected rate of return and TC's beta is 1.51. These terms would apply to new security offerings: Preferred: New preferred could be sold to the public at a price of $100 per share, with a dividend of $11. Flotation costs of $5 per share would be incurred. Debt: Debt could be sold at an interest rate of 12 percent. a. Find the component costs of debt, preferred stock, and common stock. Assume TC does not have to issue any additional shares of common stock. b. Calculate WACC 1.2 Reliable Foods is interested in calculating its weighted average cost of capital (WACC). The company's CFO has collected the following information: a. The target capital structure consists of 40 percent debt and 60 percent common stock. b. The company has 20-year non-callable bonds with a par value of $1,000, a 9 percent annual coupon, and a price of $1,075. c. Equity flotation costs are 2 percent. d. The company's common stock has a beta of 0.8. e. The risk-free rate is 5 percent. f. The market risk premium is 4 percent. g. The company's tax rate is 40 percent. h. The company plans to use retained earnings to finance the equity portion of its capital structure, so it does not intend to issue any new common stock. What is the Company's WACC? 2. Capital Budgeting Decisions 2.1. Johnson's returns on the market and Company Y's stock during the last 3 years are shown below: Year Market Company Y 1 -24% -22% 2 10 13 3 22 36 The risk-free rate is 5 percent, and the required return on the market is 11 percent. You are considering a low-risk project whose market beta is 0.5 less than the company's overall corporate beta. You finance only with equity, all of which comes from retained earnings. The project has a cost of $500 million, and it is expected to provide cash flows of $100 million per year at the end of Years 1 through 5 and then $50 million per year at the end of Years 6 through 10. What is the project's NPV (in millions of dollars)? Submission date: 27.10.2016 CA. Dr. Mahalakshmi M Financial Management - MBA ZG 521 Assignment - II (October 2016) 2.2. George is a big football star who has been offered contracts by two different teams. The payments (in millions of dollars) he receives under the two contracts are listed below: Team A Team B Year Cash Flow Cash Flow 0 $8.0 $2.5 1 4.0 4.0 2 4.0 4.0 3 4.0 8.0 4 4.0 8.0 George is committed to accepting the contract that provides him with the highest net present value (NPV). At what discount rate would he be indifferent between the two contracts? (Hint: Calculate the cross-over rate) 3. Working Capital Management 3.1. The Blue Start Corporation has an inventory conversion period of 75 days, a receivables collection period of 38 days, and a payables deferral period of 30 days. a. What is the length of the firm's cash conversion cycle? b. If Blue Start's annual sales are $3,421,875 and all sales are on credit, what is the firm's investment in accounts receivable? c. How many times per year does Blue Start turn over its inventory? 3.2. The Eastern Corporation is trying to determine the effect of its inventory turnover ratio and days sales outstanding (DSO) on its cash flow cycle. Eastern's sales last year (all on credit) were $150,000, and it earned a net profit of 6%, or $9,000. It turned over its inventory 5 times during the year, and its DSO was 36.5 days. The firm had fixed assets totaling $35,000. Eastern's payables deferral period is 40 days. a. Calculate Eastern's cash conversion cycle. b. Assuming Eastern holds negligible amounts of cash and marketable securities, calculate its total assets turnover and ROA. c. Suppose Eastern's managers believe that the inventory turnover can be raised to 7.3 times. What would Eastern's cash conversion cycle, total assets turnover, and ROA have been if the inventory turnover had been 7.3 for the year? 4. Capital Structure Decisions 4.1. Abott Co. is currently operating in a stable market and it expects no growth, so all earnings are paid out as dividends. The debt consists of perpetual bonds. The financial situation of the company is as follows: a) EBIT = $4 miilion b) Tax rate, T=35% c) Value of debt, D=$2 miilion d) Kd = 10% e) Ke =15% f) Shares of stock outstanding, n = 600,000 Determine: Submission date: 27.10.2016 CA. Dr. Mahalakshmi M Financial Management - MBA ZG 521 Assignment - II (October 2016) A. What is the total market value of the firm's stock, S, its price per share P0, and the firm's total market value, V? B. What is the firm's weighted average cost of capital? C. The firm can increase its debt by $8 million, to a total of $10 million, using the new debt to buy back and retire some of its shares. Its interest rate on all debt will be 12% (it will call and refund the old debt), and its cost of equity will rise from 15% to 17%. EBIT will remain constant. Should the firm change its capital structure? 4.2. Nelson Software Co. is trying to establish its optimal capital structure. Its current capital structure consists of 25% debt and 75% equity; however, the CFO believes that the firm should use more debt. The risk-free rate, rRF, is 5%; the market risk premium RPM, is 6%; and the firm's tax rate is 40%. Currently. Nelson Software's cost of equity is 14%, which is determined by the CAPM. What would be Nelson Software's estimated cost of equity if it changed its capital structure to 50% debt and 50% equity? 5. Dividend policy Pamerson Company has a capital budget of $1.2 million. The company wants to maintain a target capital structure which is 60% debt and 40% equity. The company forecasts that its net income this year will be $600,000. If the company follows a residual dividend policy, what will be its payout ratio? 1. Integrated problem Terry Inc. currently has assets of $5 million, has zero debt, is in the tax bracket of 40%, has a net income of $1 million, and pays out 40% of its earnings as dividends. Net income is expected to grow at a constant rate of 5% per year, 200,000 shares of stock are outstanding, and the current WACC is 13.40%. The company is considering a recapitalisation where it will issue $1 million in debt and use the proceeds to repurchase stock. Investment bankers have estimated that if the company goes through with the recapitalization, its before-tax cost of debt will be 11% and its cost of equity will rise to 14.5%. a) What is the stock's current price per share (before the recapitalisation)? b) Assuming the company maintains the same payout ratio, what will be its stock price following the recapitalisation? *********************************************************************************** Submission date: 27.10.2016 CA. Dr. Mahalakshmi M