🏷️ LIMITED TIME OFFER: GET 20% OFF GRADE+ YEARLY SUBSCRIPTION →
Log in
Finance
1
answer
0
watching
1,323
views

An analyst has collected the following information regarding Christopher Co.: The company’s capital structure is 30 percent debt and 70 percent equity. The company’s outstanding bond is currently traded at $891.81. It has 30 years to maturity, 8% coupon rate that pays semiannually, and face value of $1,000. The company’s year-end dividend is forecasted to be $0.80 a share (D1). The company expects that its dividend will grow at a constant rate of 9 percent a year. The company’s stock price is $25. The company’s tax rate is 40 percent. The company anticipates that it will need to raise new common stock this year, and total flotation costs will equal 10 percent of the amount issued. Assume the company use retained earnings, and does not take accounts for flotation costs. Given this information, calculate the company’s WACC.

Watch
1
answer
0
watching
1,323
views

For unlimited access to Homework Help, a Homework+ subscription is required.

Jarrod Robel
Jarrod RobelLv2
28 Sep 2019

Unlock all answers

Get 1 free homework help answer.
Already have an account? Log in
Share

Related questions

Florida Electric Company (FEC) uses only debt and equity. It can borrow unlimited amounts at an interest rate of 10 percent as long as it finances at its target capital structure, which calls for 45 percent debt and 55 percent common equity. Its last dividend was $2, its expected constant growth rate is 4 percent, its stock sells at a price of $25, and new stock would net the company $20 per share after flotation costs. FEC’s marginal tax rate is 40 percent, and it expects to have $100 million of retained earnings this year. Two projects are available: Project A has a cost of $200 million and an expected return of 13 percent, and Project B has a cost of $125 million and an expected return of 10 percent. All of the company’s potential projects are equally risky.

M12-22. Estimating Weighted Average Cost of Capital. Assume that a company has $1 billion in preferred stock and $3 billion in common stock. Also, it pays 6% dividends on preferred stock and its cost of equity capital is 7%. The company has no debt. Compute the company’s WACC.

M12-23. Estimating Company Value Using DDM with Constant Perpetuity. Assume that a company’s dividends per share are projected to remain at $1.20 each year, and that its cost of equity capital is 5%. Estimate the company’s per share stock price.

M12-25. Estimating Company Value Using DDM with Increasing Perpetuity. Assume that a company’s dividends per share are projected to grow at 2% each year, its next year’s dividends per share is $1.20, and its cost of equity capital is 5%. Estimate the company’s per share stock price.

M12-26. Estimating Company Value Using DDM with Increasing Perpetuity. Assume that a company paid $1.20 dividend per common share, its dividend per share is expected to grow at a constant rate of 2%, and its cost of equity capital is 5%. Estimate the company’s per share stock price.

Cleaner Than Dirt manufactures a variety of household products. The company is considering
introducing a new household cleaning product. The company’s CFO has collected the following
information about the proposed product. (Note: You may or may not need to use all of this information,
use only the information that is relevant.)
• The project has an anticipated economic life of 4 years.
• The company will have to purchase a new machine to produce the product. The machine has an upfront
cost (t = 0) of $2 million. The machine will be depreciated on a straight-line basis over 4 years
(that is, the company’s depreciation expense will be $500,000 in each of the first four years (t = 1, 2,
3, and 4). The company anticipates that the machine will last for four years, and that after four
years, its salvage value will equal zero.
• If the company goes ahead with the proposed product, it will have an effect on the company’s net
operating working capital. At the outset, t = 0, inventory will increase by $140,000 and accounts
payable will increase by $40,000. At t = 4, the net operating working capital will be recovered after
the project is completed.
• The new product is expected to generate sales revenue of $1 million the first year (t = 1), $2 million
the second year (t = 2), $2 million the third year (t = 3), and $1 million the final year (t = 4). Each
year the operating costs (not including depreciation) are expected to equal 50 percent of sales
revenue.
• The company’s interest expense each year will be $100,000.
• The new product is expected to reduce the after-tax cash flows of the company’s existing products
by $250,000 a year (t = 1, 2 , 3, and 4).
• The company’s overall WACC is 10 percent. However, the proposed project is riskier than the
average project for Cleaner Than Dirt; the project’s WACC is estimated to be 12 percent.
• The company’s tax rate is 40 percent.
What is the net present value of the proposed project?

Weekly leaderboard

Home
Homework Help 3,900,000
Finance 370,000
Start filling in the gaps now
Log in