Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Sluggo, Inc. Makers of the World's Best 9-inch Nails Financials (in thousands): ASSETS: Cash $500; Inventory $100; Accounts Receivables $200; Plant & Equipment $2000, Depreciation

Sluggo, Inc.

Makers of the World's Best 9-inch Nails

Financials (in thousands):

ASSETS: Cash $500; Inventory $100; Accounts Receivables $200; Plant & Equipment $2000, Depreciation $200; Land $2000, Goodwill $100, Trademark $100

LIABILITIES: Current Liabilities $50; Long-Term Liabilities $1650

Gross income for 2020 is $1500 (all credit sales); COGS is $400, Administrative and General expenses are $400, Sluggo pays 4% interest on its liabilities and it's corporate tax rate is 20%.

Capital Improvement:

Sluggo wants to build a factory which would produce the steel for the 9-inch nails. The initial cash outlay is $1000, the factory is expected to be productive for 5 years, the required rate of return is 5%, and the free cash flow each year is expected to be $250.

Capital Structure:

Currently, when Sluggo finances a capital improvement, it uses bonds (debt) and raises 35% of raised money in debt; common stock where 60% of raised money is from retained earnings, and 5% of raised capital is from preferred stock. Capital structure: 35% bonds, 60% common stock, 5% preferred stock.

Bonds: 10-year, 4% coupon, market value is $975, corporate tax rate is 20%

Common stock: Beta of 1.25, risk free rate of 2%, market risk of 9%

Preferred stock: Par value of $100.00, dividend rate is 10%, market value of $100.00

Because Sluggo wants to be efficient when ordering the steel to make the 9-inch nails, it needs to calculate the efficient order quantity (EOQ) and the total inventory cost (TIC).It sells 50,000 9-inch nails each year, the carrying costs are 30% of the product price of $5, and the supplier always charges a $250 delivery charge for each shipment of steel.

When borrowing short-term cash (a 270-day, 9-month loan), Sluggo uses commercial paper, that is an unsecured 9-month loan from a large corporation.If Sluggo's cash conversion cycle is less than 60 days, the APR is 4%.Sluggo may consider raising short term cash by selling a 10-year, 4% coupon bond. However, it realizes lenders will require 6%.

question :

1)Using the WACC:

a.Calculate the after-tax interest required from bonds

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Fundamentals Of Investing

Authors: Scott B. Smart, Lawrence J. Gitman, Michael D. Joehnk

13th Edition

978-0134083308, 013408330X

More Books

Students also viewed these Finance questions

Question

=+48. Oil prices, again. Return to the oil price data of Exercise

Answered: 1 week ago