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Q1) TRM Consulting Services presently has given capital structure:

Source

Book Value

Quantity

Common Stock

$6,500,000

350,000

Preferred Stock

$375,000

7,500

Debt

$4,000,000

4,000

Debt is represented by 15-year original maturity bonds, issued 5 years ago, with coupon rate of 8% and are presently selling for $965. Bonds pay interest semi-annually. Favoured stock pays $5 dividend annually and is presently valued at $60 per share. Flotation costs on debt and favoured equity are negligible and can be ignored, but they will be 8% of selling price for common stock. Common stock, which can be purchased for $32.00, has experienced a 5% annual growth rate in dividends and is expected to pay $1.50 dividend next year. Additionally, firm expects to have $150,000 of retained earnings. Suppose that TRM's marginal tax rate is 35%.

a) Set up worksheet with all of the data from the problem in a well-organized input area.

b) Compute book-value weights for each source of capital

c) Compute market-value weights for each source of capital.

d) Compute component costs of capital (i.e., debt, preferred equity, retained earnings, and new common equity).

e) Compute the weighted average costs of capital by using both market-value and book value wei.

Accounting Basics, Accounting

  • Category:- Accounting Basics
  • Reference No.:- M917298

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