ADMS 1500 Study Guide - Final Guide: Net Present Value, Disturbance Storm Time Index, Weighted Arithmetic Mean

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sangriahamster307

12 Sep 2014

School

York University

Department

Administrative Studies

Course

ADMS 1500

Professor

Paul Evans

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Document Summary

Leverage company with a lot of debt is highly leveraged, which is good for the shareholders. It means that they have less risk, and higher participation. Debt holders are entitled to a fixed amount of interest. It only works if the company is going to be successful. You would prefer to hold shares if you would like a risk. Debt with low debt to equity ratio = holding debt is more secure. Common shares have the residual, preferred shareholders have some sort of preference (in voting, income) To debt and equity being combined together, percentage figure. Abc company has million debt at 8% and million common share equity. Required rate of return of common shareholders is 20%. Right company has 000 debt at 12% and 000 common share equity. Rate of return of common shareholders is 18%. Abc company has million debt at 10% and million common share equity.

Related Questions

1) A company has target values of debt, preferred and common of $23MM, $16MM and $85MM. It has book values of debt, preferred and common of $66MM, $7MM and $18MM. It also has liquidation values of debt, preferred and common of $38MM, $19MM and $6MM. What weights should it use for purposes of estimating WACC?

Debt 60.3%; Preferred 30.2%; Common 9.5%

Debt 18.6%; Preferred 12.9%; Common 68.5%

Debt 23.4%; Preferred 46.2%; Common 31.4%

Debt 72.5%; Preferred 7.7%; Common 19.8%

2) Quantix Corp has shares with a beta of 1.3. The risk free rate is 3% and the expected market return is 9%. Its tax rate is 30%. The company's shares currently trade for $45 a share. What is the company's estimated cost of retained earnings?

3) Â· A company has target weights of debt, preferred and common equity of 20%, 10% and 70%, respectively. It has liquidation values of debt, preferred and common equity of 30%, 15% and 55%. Its book values of debt, preferred and common equity are 40%, 10% and 50%. The estimated costs, net of adjustments, to the issuer are 5%, 7% and 11% for debt, preferred and common equity. Estimate the firm's weighted average cost of capital.

4) Â· Deltona issued preferred shares four years ago at $60 per share, with a promised dividend of $5 per share. The company's tax rate is 35%, and its common stock beta is 0.80. Yields on comparable risk preferred stocks are 10%. The floatation expense percentage is 10. What is the cost to Deltona to issue preferred shares under current market conditions? Express your answer as a percentage, and round to two decimal points.

5) Â· Yield to maturity (YTM) on debt issues with risk comparable to the Sonar Company is currently 10.6%. Sonar has issued debt two years ago with a YTM of 8.00%. Sonar's common stock beta is 1.15, and its tax rate is 28. The appropriate rate for Sonar to use for debt in estimating its WACC is what rate? Show your answer as a percentage, rounded to two decimal places.

6) Â· A company expects to earn $24 million in income this coming year. Its target capital structure is 30% debt, 15% preferred stock, and 55% common equity financing. The company normally pays a dividend equal to 30% of its earnings. At what point will its WACC move from one level to the next, based upon the need to issue new common shares, assuming it adheres to its target capital structure? At what total capital investment level? Show your answer in millions of dollars with one decimal point ($34,000,000 you would record as 34.0)

Please answer ALL of these questions. It would really help me out! Thanks!

1. MV corporation has debt with Market value of $100 million, common equity with a book value of $100 million, and preferred stock woth $20 million outstanding. It's common equity trades at $50 per share, and the firm has 6 million shares outstanding. What weights should MV corporation use in its WACC

2. Book co. has 1.5 million shares of common stock equity with a par (book) value of $1.40, retained earnings of $28.1 million, and its shares have a market value of $51.74 per share. it also has debt with a par value of $19.1 million that is trading at 104% of par.

a. What is the market value of its equity?

b. What is the market value of its debt?

c. What weights should it use in computing its WACC?

3. Avicorp has a $10 million debt issue outstanding, with a 6% coupon rate. The debt has semiannual coupons, the next coupon is due in six months, and the debt matures in five years. It is currently priced at 95% of par value.

(a) What is Avicorpâs pretax cost of debt?

(b) If Avicor faces a 40% tax rate, what is its after-tax cost of debt? The after-tax cost of debt for Avicor is:

4. Dewyco has preferred stock trading at $50 per share. The next preferred dividend of $4 is due in one year. What is Dewycoâs cost of capital for preferred stock?

5. Steady Company's stock has a beta of 0.24. If the risk-free rate is 5.8% and the market risk premium is 7.1%, what is an estimate of Steady Company's cost of equity?

(round to one decimal place)

6. HighGrowth Company has a stock price of $20. The firm will pay a dividend of $1 next year, and its divident is expected to grow at a rate of 4% per year thereafter. What is your estimate of HighGrowth's cost of equity capital?

7. CoffeeCarts has a cost of equity of 15%, an effective cost of debt of 4%, and it's financed 70% with equity and 30% with debt. What is this firm's WACC?

8. AllCity Inc is financed 40% with debt, 10% with preferred stock, and 50% with common stock. Its pretax cost of debt is 6%. Its preferred stock pays an annual dividend of $2.50 and is priced at $30. It has an equity beta of 1.1. Assume the risk-free rate is 2%, the market risk premium is 7% and AllCity's tax rate is 35%. What is its after-tax WACC?

9. Growth company's current share price is $20 and is expected to pay a $1 dicidend per share next year. After that, the firm's dividends are expected to grow at a rate of 4% per year.

Growth company has existing debt issued three years ago with a coupon rate of 6%. The firm just issued new debt at a par with a coupon rate of 6.5%.

a. What is Growth Company's pre-tax cost of debt?

b. Growth Company also has preferred stock outstanding that pays $2 per share fixed dividend. If the stock is currently price at $28, what is Growth Company's cost of preffered stock?

c. Growth Company has existing debt issued three years ago with a coupon rate of 6%. The firm just issued new debt at par with a coupon rate of 6.5%. What is Growth Company's pretax cost of debt?

d. Growth Company has 5 million common shares outstanding and 1 million preferred shares outstanding, at its total book value is $50 million. Its liabilitities have a market value of $20 million. If Growth Company's common and preferred shares priced as in parts a and b, what is the market value of Growth Company's assets?

e. Growth Company faces a 35% tax rate. Given the information in parts a through d, and your answers to those problems, what is Growth Company's WACC?

10. A retail coffee company is planning to open 100 new coffee outlets that are expected to generate, in total, $15 million in free cash flows per year, with a growth rate of 3% in perpetuity. If the coffee companyâs WACC is 10%, what is the NPV of this expansion?

Analyzing and Interpreting Equity Accounts and Comprehensive Income
Following is the shareholdersâ equity section of the 2013 balance sheet for Procter & Gamble Company and its statement of shareholdersâ equity.

June 30 (In millions, except per share amounts)	2013
Shareholders' Equity
Convertible Class A preferred stock, stated value $ 1 per share
(600 shares authorized)	$ 1,137
Non-voting Class B preferred stock, stated value $ 1 per share
(200 shares authorized)	--
Common stock, stated value $ 1 per share
(10,000 shares authorized; shares issued: 2013-4,009.2)	4,009
Additional paid-in capital	63,538
Reserve for ESOP debt retirement	(1,352)
Accumulated other comprehensive income/(loss)	(7,499)
Treasure stock, at cost (shares held: 2013-1,266.9)	(71,966)
Retained earnings	80,197
Noncontrolling interest	645
Total shareholders' equity	$ 68,709

Consolidated Statement of Shareholders' Equity
Dollars in millions; Shares in thousands	Common Shares Outstanding	Common Stock	Preferred Stock	Additional Paid-in Capital	Reserve for ESOP Debt Retirement	Accumulated Other Comprehensive Income (Loss)	Treasury Stock	Retained Earnings	Noncontrolling Interest	Total
Balance June 30, 2012	$ 2,748,033	$ 4,008	$ 1,195	$ 63,181	$ (1,357)	$ (9,333)	$ (69,604)	$ 75,349	$ 596	$ 64,035
Net earnings								11,312	90	11,402
Other comprehensive income						1,834				1,834
Dividends to shareholders:
Common								(6,275)		(6,275)
Preferred, net of tax benefits								(244)		(244)
Treasury purchases	(84,234)						(5,986)			(5,986)
Employee plan issuances	70,923	1		352			3,573			3,926
Preferred stock conversions	7,605		(58)	7			51			â
ESOP debt impacts					5			55		60
Noncontrolling interest, net				(2)					(41)	(43)
Balance June 30, 2013	$ 2,742,327	$ 4,009	$ 1,137	$ 63,538	$ (1,352)	$ (7,499)	$ (71,966)	$ 80,197	$ 645	$ 68,709

(a) What does the term convertible (in reference to the company's Class A preferred stock) mean?

Convertible means the holder of the security has an obligation to convert (exchange) the security into another security.

Convertible means the holder of the security has an option to surrender the security and to receive cash at any time.

Convertible means the holder of the security has an option to convert (exchange) the security into another security.

Convertible means the holder of the security has an option to sell the security at any time.

(b) How many shares of common stock did Procter & Gamble issue when convertible Class A preferred stock was converted during fiscal 2013?

Answer

thousand shares

(c) For "employee plan issuances," at what average price was the common stock issued as of year-end 2013? (Round your answer to two decimal places.)

$Answer

(d) What is the accumulated other comprehensive income account?

The accumulated other comprehensive income account reflects the cumulative profit recognized by the company less the cumulative dividends that have been paid to shareholders.

The accumulated other comprehensive income account reflects the cumulative change in net assets (defined as assets less liabilities) for transactions other than net income transactions and transactions with shareholders.

The accumulated other comprehensive income account reflects the cumulative profit on transactions with shareholders.

The accumulated other comprehensive income account reflects the cumulative amount by which the company's common stock has increased or decreased since issuance.

(e) What cash dividends did Procter & Gamble pay in 2013 for each class of stock?

Common dividends =Answer

($ millions)
Preferred dividends =Answer($ millions)

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ADMS 1500 Study Guide - Final Guide: Net Present Value, Disturbance Storm Time Index, Weighted Arithmetic Mean

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