9. Reference is made to the 2015 Balance Sheet of Southwest limited.
Southwest Limited Balance Sheet 2015
Cash 1,000,000.00 Accounts Payable 8,000,000.00
Acc. Receivable 12,000,000.00 Notes Payable 8,500,000.00
Marketable securities 3,000,000.00 Long-term Debt 20,000,000.00
Inventories 7,500,000.00 Common stock 7,500,000.00
Fixed Assets 26,500,000.00 Preferred Stock 6,000,000.00
Total Assets 50,000,000.00 Total Liabilities and Equity 50,000,000.00
Additional Information:
i. The Long-Term debt consists of 8% annual coupon bonds, with 15 years to
maturity and are currently selling for 95% of par.
ii. The companyâs common shares which have a book value of $20 per share are
currently selling at $25 per share.
iii. Preferred shares have a book value of $100 per share. These shares are currently
selling at $120 per share and pays dividends of 6% per annum.
iv. The dividend growth rate is expected to be 3%, and dividend for 2016 is projected
to be $5.00 per share.
v. The Companyâs Tax rate is 30%.
Required:
Determine the following for Southwest Limited:
(a) Total Market value of the firmâs capital structure
(b) After-tax Cost of Debt
(c) Cost of Common Stock
(d) Cost of Preferred Stock
(e) WACC
9. Reference is made to the 2015 Balance Sheet of Southwest limited.
Southwest Limited Balance Sheet 2015
Cash 1,000,000.00 Accounts Payable 8,000,000.00
Acc. Receivable 12,000,000.00 Notes Payable 8,500,000.00
Marketable securities 3,000,000.00 Long-term Debt 20,000,000.00
Inventories 7,500,000.00 Common stock 7,500,000.00
Fixed Assets 26,500,000.00 Preferred Stock 6,000,000.00
Total Assets 50,000,000.00 Total Liabilities and Equity 50,000,000.00
Additional Information:
i. The Long-Term debt consists of 8% annual coupon bonds, with 15 years to
maturity and are currently selling for 95% of par.
ii. The companyâs common shares which have a book value of $20 per share are
currently selling at $25 per share.
iii. Preferred shares have a book value of $100 per share. These shares are currently
selling at $120 per share and pays dividends of 6% per annum.
iv. The dividend growth rate is expected to be 3%, and dividend for 2016 is projected
to be $5.00 per share.
v. The Companyâs Tax rate is 30%.
Required:
Determine the following for Southwest Limited:
(a) Total Market value of the firmâs capital structure
(b) After-tax Cost of Debt
(c) Cost of Common Stock
(d) Cost of Preferred Stock
(e) WACC
Related questions
1) The capital structure weights used in computing the weighted average cost of capital are based on what values of the firm (i.e. book, adjusted book, market, etc):
| Debt | 50,000 bonds with 6.5 coupon rate, payable annually, $1,000 par value, 20 years to maturity, selling at 96.3. |
| Common Stock | 1,000,000 shares of common stock outstanding. The stock sells for a price of $40 per share and has a beta of 1.5 |
| Preferred Stock | 150,000 preferred shares outstanding, currently trading at $120 per share; with an annual dividend payment of $9.00 |
| Market | The market risk premium is 9% and the risk free rate is 3% |
| Tax Rate | 30% |
What is the before tax cost of debt?
What is the after tax cost of debt?
What is the company
