Problem 1
Calculate all MCC break points for the following information:
Total assets = $1,500,000
Total debt = $600,000
Total equity = $900,000
kd is 10% up to $500,000 and is 11% after $500,000
ks is 13% up to $100,000 and is 14% after $100,000
Problem 2
Calculate the AT kd, ks, kn for the following information:
Loan rates for this firm = 9%
Growth rate of dividends = 4%
Tax rate = 30%
Common Dividends at t1 = $ 4.00
Price of Common Stock = $35.00
Flotation costs = 6%
problem3
Your firm is in the 30% tax bracket with a before-tax required rate of return on its equity of 13% and on its debt of 10%. If the firm uses 60% equity and 40% debt financing, calculate its after-tax WACC.
problem 4
Babe's Dog Obedience School, Inc., wants to maintain its current capital structure of 50 percent common equity, 10 percent preferred stock, and 40 percent debt. Its cost of common equity is 13 percent, and the cost of preferred stock is 12 percent. The bank's effective annual interest rate is 11 percent for amounts borrowed that are less than or equal to $1 million and 13 percent for amounts between $1 million and $2 million. If more than $2 million is borrowed, the effective annual interest rate charged is 15 percent. Babe's tax rate is 40 percent. The firm expects to realize $2,750,000 in net income this year after preferred dividends have been paid. The current price per share of Babe's common stock is $44.23, the expected dividend per share is $4.20, the expected growth rate is 4 percent. If Babe needs to issue new common stock, the flotation cost is 5 percent of share price.
Here are the investment opportunity options that Babe is considering:
Project A requires an initial investment of $900,000. The expected rate of return for Project A is 11.75%.
Project B requires an initial investment of $2,100,000. The expected rate of return for Project B is 11.50%.
Project C requires an initial investment of $2,100,000. The expected rate of return for Project C is 11.40%.
Project D requires an initial investment of $9,000,000. The expected rate of return for Project D is 11.00%.
**Express all of the percentage answers to two (2) decimal places.**
a. Calculate the first debt break point.
b. Calculate the second debt break point.
c. Calculate the equity break point.
d. Calculate the highest MCC for Project A only.
e. Calculate the highest MCC for Projects A and B.
f. Calculate the highest MCC for Projects A, B, and C,
g. Calculate the highest MCC for Projects A, B, C, and D.
h. Based on your analysis, which project(s) would you recommend that Babe undertake?
I have created a graph to help you "see " this problem and more fully understand the analysis that you are doing (see below). I have covered the exact numbers for the respective MCCs, but the graph should tell you if your calculations using the formulas are correct. Remember to express all of your MCCs in percentages to two (2) decimal places. That is how I will know that you know how to use the formulas.
Problem 1
Calculate all MCC break points for the following information:
Total assets = $1,500,000
Total debt = $600,000
Total equity = $900,000
kd is 10% up to $500,000 and is 11% after $500,000
ks is 13% up to $100,000 and is 14% after $100,000
Problem 2
Calculate the AT kd, ks, kn for the following information:
Loan rates for this firm = 9%
Growth rate of dividends = 4%
Tax rate = 30%
Common Dividends at t1 = $ 4.00
Price of Common Stock = $35.00
Flotation costs = 6%
problem3
Your firm is in the 30% tax bracket with a before-tax required rate of return on its equity of 13% and on its debt of 10%. If the firm uses 60% equity and 40% debt financing, calculate its after-tax WACC.
problem 4
Babe's Dog Obedience School, Inc., wants to maintain its current capital structure of 50 percent common equity, 10 percent preferred stock, and 40 percent debt. Its cost of common equity is 13 percent, and the cost of preferred stock is 12 percent. The bank's effective annual interest rate is 11 percent for amounts borrowed that are less than or equal to $1 million and 13 percent for amounts between $1 million and $2 million. If more than $2 million is borrowed, the effective annual interest rate charged is 15 percent. Babe's tax rate is 40 percent. The firm expects to realize $2,750,000 in net income this year after preferred dividends have been paid. The current price per share of Babe's common stock is $44.23, the expected dividend per share is $4.20, the expected growth rate is 4 percent. If Babe needs to issue new common stock, the flotation cost is 5 percent of share price.
Here are the investment opportunity options that Babe is considering:
Project A requires an initial investment of $900,000. The expected rate of return for Project A is 11.75%.
Project B requires an initial investment of $2,100,000. The expected rate of return for Project B is 11.50%.
Project C requires an initial investment of $2,100,000. The expected rate of return for Project C is 11.40%.
Project D requires an initial investment of $9,000,000. The expected rate of return for Project D is 11.00%.
**Express all of the percentage answers to two (2) decimal places.**
a. Calculate the first debt break point.
b. Calculate the second debt break point.
c. Calculate the equity break point.
d. Calculate the highest MCC for Project A only.
e. Calculate the highest MCC for Projects A and B.
f. Calculate the highest MCC for Projects A, B, and C,
g. Calculate the highest MCC for Projects A, B, C, and D.
h. Based on your analysis, which project(s) would you recommend that Babe undertake?
I have created a graph to help you "see " this problem and more fully understand the analysis that you are doing (see below). I have covered the exact numbers for the respective MCCs, but the graph should tell you if your calculations using the formulas are correct. Remember to express all of your MCCs in percentages to two (2) decimal places. That is how I will know that you know how to use the formulas.
