(weight average cost of capital)

2.(Weighted average cost of capital) Crypton Electronics has a capital structured consisting of 44% common stock and 56% debt, A debt issues of 1,000 par value, 6.5% bonds and mature 15 years and pay annual interest will sell for $973. Common stock of the firm is currently selling for $30.71 per share and the firm expects to pay a $2.23 dividend next year. Dividends have grown at the rate of 5.2% per year and are expected to continue to do so for the foreseeable future. What is Crypton’s cost of capital where the firm tax rate is 30%?

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3. (Weighted average cost of capital) The target capital structure for Jowers manufacturing is 45% common stock 10% preferred stock and 45% debt. If the cost of common equity for the firm is 20.5%, the cost of preferred stock is 11.5% and the before tax cost of debt is 9.7%, what is Jowers’s cost of capital? The firm’s tax rate is 34%

4. (Weighted average cost of capital) As a member of the

4. (Weighted average cost of capital) As a member of the Financial Department of Ranch Manufacturing, your supervisor has asked you to compute the appropriate discount rate to use when evaluating the purchase of new packaging equipment for the plant. Under the assumption that the firm’s present capital structure reflects the appropriate mix of capital sources for the firm, you have determined the market value of the firm’s capital structure as follows

Source of Capital Market Values
Bonds 3,500,000
Preferred stock 2,300,000
Common stock 5,900,000

To finance the purchase, Ranch manufacturing will sell 10-yer bonds paying 7.3% per year at the market price of 1,064 Preferred stock paying a $1.93 dividend can be sold for $25.33. Common stock for Ranch manufacturing is currently selling for $55.31 per share and the firm paid a $2.97 dividend last year. Dividends are expected to continue growing at a rate of 5.2% per year into the indefinite future. If the firm’s tax rate is 30%, what discount rate should you use to evaluate the equipment purchase?

Ranch Manufacturing’s WACC is ______________% (round to three decimal places)

5. (EBIT-EPS analysis) Abe Forrester and three of his friends from college have interested a group of venture capitalists in backing their business idea. The proposed operation would consist of a series of retail outlets to distribute and service a full line of vacuum cleaners and accessories. These stores would be located in Dallas, Houston and
San Antonio. To finance the new venture two plans have been proposed:
Plan A is an all-common –equity structure in which $2.4 million dollars would be raised by selling 80,000 shares of common stock.
Plan B would involved issuing 1.5 millions dollars in long-term bonds with an effective interest rate of 11.5% plus $0.9 million would be raised by selling $40,000 shares of common stock. The debt funds raised under Plan B have no fixed maturity date, in that this amound of financial leverage is considered a permanent part of the firm’s capital structure. Abe and his partners plan to use a 38% tax rate in their analysis, and they have hired you on a consulting basis to do the following:
A. Find the EBIT indifference level associated with the two financing plans.
B. Prepare a pro forma income statement for the EBIT level solved for in Part a. that shows that EPS will be the same regardless whether Plan A or B is chosen

a. Find the EBIT indifference level associate with the two financing plans.
The EBIT indifference level associated with the two financing plans is ______% (round to the nearest dollar)
b. Prepare a pro forma income statement for the EBIT level solved for in Part a. that shows that EPS will be the same regardless whether Plan A or B is chosen.
Complete the segment of the income statement for Plan A below: (round income statement amounts to the nearest dollar except the EPS to the nearest cent)

STOCK PLAN
EBIT _$_______
Less: Interest Expense___________
Earnings Before Taxes _$____________
Less Taxes at 38%______________
Net Come__$_________________
Number of Common Shares__________________
EPS__$____________
Complete the segment of the income statement for Plan B below (round income statement amounts to the nearest dollar except the EPS to the nearest cent.)
BOND/STOCK Plan
EBIT $_________________
Less: Interest Expense ___________________
Earnings Before Taxes $_________________
Less: Taxes at 38%
Net Income $_____________
Number of Common Shares
EPS $_______________

6. Three recent graduates of the computer science program at the University of Tennessee are forming a company that will write and distribute new application software for the iPhone. Initially, the corporation will operate in the southern region of Tennessee, Georgia, North Carolina, and South Carolina, A small group of private investors in the Atlanta, Georgia area is interested in financing the startup company and two financing plans have been put forth for consideration.
The first (Plan A) is an all common-equity capital structure, $2.4 million dollars would be raised by selling common stock at $10 per common share.
Plan B would involve the use of financial leverage $1.1 million dollars would be raised by selling bonds with an effective interest rate of $10.9% (per annum) and the remaining $1.3 million would be raised by selling common stock $10 per share. The use of financial leverage is considered to be a permanent part of the firm’s capitalization, so no fixed maturity dgte is needed for the analysis. A 30% tax rate is deemed appropriate for the analysis,
a. Find the EBIT indifference level associated with the two financing plans.
b. A detailed financial analysis of the firm’s prospects suggests that the long-term EBIT will be above $310,000annually. Taking this into consideration, which plan will generate the higher EPS?
c. A. Find the EBIT indifference level associated with the two financing plans.
The EBIY indifference level associated with the two financing plans is ________ (round to the nearest dollar)
c. A detailed financial analysis of the firm’s prospects suggest that the long-term EBIT will be above $310,000 annually. Taking this into consideration, which plan will generate the higher EPS?
Complete the segment of the income statement for Plan below (round income statement amounts to the nearest dollar excepts the EPS to the nearest cent.)

STOCK PLAN
EBIT $_____________
Less: Interest expense___________
Earrings Before taxes $_______________
Less: Taxes at 30%___________
Net Income $_________________
Number of common shares_____________
EPS $_____________________-

Complete the segment of the income statement for plan B below: (round income statement amounts to the nearest dollar except the EPS to the nearest cent.)

EBIT $_________________
Less: Interest Expense________________
Earnings Before Taxes$____________
Less: Taxes at 30% _______________
Net Income $_______________
Number of common Shares _____________

EPS $_______________