Ask Question, Ask an Expert

+1-415-315-9853

info@mywordsolution.com

Ask Financial Accounting Expert

Problem1. Here is the condensed 2012 balance sheet for Skye Computer Company (in term o thousand dollars):
Current Assets: 2000; Net Fixed Assets: 3000; Total Assets; 5000.

Current liabilities: 900; long term debt: 1200; Preferred stock (10000 shares): 250; common stock (50000 shares): 1300; retained earnings: 1350; total common equity: 2650; total liabilities and equity: 5000

Skye's earnings per share previous year were $3.20. The common stock sells for $55.00, previous year's dividend (Do) was $2.10, and a flotation cost of 10% would be needed to sell new common stock. Security analysts are projecting that the common dividend will grow at annual rate of 9%. Skye's preferred stock pays a dividend of $3.30 per share, and its preferred stock sells for $30.00 per share. The firm can issue long term debt at interest rate (or before-tax cost) of 10%, and its marginal tax rate is 35%. The firm's currently outstanding 10% annual coupon rate long-term debt sells at par value. The market risk premium is 5%, risk free rate is 6% and Skye's beta is 1.516. In its cost of capital computation, the company considers only long-term capital; thus, it disregards current liabilities for computing its WACC.

problem1. Compute the cost of each capital component, that is, after-tax cost of debt, cost of preferred stock, the cost of equity from retained earnings and cost of newly issued common stock. Use the DCF technique to find the cost of common equity.

problem2. Now compute the cost of common equity from retained earnings using the CAPM method.

problem3. What is the cost of new common stock based on CAPM? (Hint: Find out the difference between re and rs as determined by the DCF technique and add that differential to the CAPM value for rs.)

problem4. If Skye continues to use the same market-value capital structure, what is firm's WACC supposing that (1) it uses only retained earnings for equity? (2) If it expands so rapidly that is should issue new common stock?

Financial Accounting, Accounting

  • Category:- Financial Accounting
  • Reference No.:- M94283

Have any Question? 


Related Questions in Financial Accounting

Business finance assignmenttasks to complete1download and

Business Finance Assignment Tasks to complete: 1. Download and save the Excel file, "Excel_Assignment". The file is located in the Excel Assignment folder. 2. Save the file to your own drive and rename the file with your ...

Excel project instructionsassume abc company has asked you

EXCEL PROJECT INSTRUCTIONS Assume ABC Company has asked you to not only prepare their 2015 year-end Balance Sheet but to also provide pro-forma financial statements for 2016. In addition, they have asked you to evaluate ...

Research the major risks for businesses that indulge in

Research the major risks for businesses that indulge in commercial applications of social networking. Also, review the readings on page 311 of your textbook about how organizations can respond to social networking proble ...

Explain and analyze the external factors on or of

Explain and analyze the external factors on or of international business (e.g., political, legal, economics, culture, etc.) and how these may impact business.

1 at what position levels of employees is ethics an

1. At what position levels of employees is ethics an important part of decision making in a company? 2. The Foreign Corrupt Practices Act outlaws what type of business practices and how? 3. Conduct a Porter’s 5 forces an ...

Consider four different stocks all of which have a required

Consider four different stocks, all of which have a required return of 18.5 percent and a most recent dividend of $3.65 per share. Stocks W, X, and Y are expected to maintain constant growth rates in dividends for the fo ...

Compare and contrast two or more models of health leader

Compare and contrast two or more models of health leader assessment and evaluation and analyze the process of capturing metrics for this assessment and evaluation within a health organization. This question has to do wit ...

What is the impact of implementing a lean system on the

What is the impact of implementing a lean system on the relationship between managers and employees? Does the lean systems have a positive or a negative impact on the relationships between managers and workers?

Problem 1on january 1 2010 branson designers issued 900

Problem 1 On January 1, 2010, Branson Designers issued $900 Million of its 8% bonds $836 million. The bonds were then prices to yield 10%. The interest will be payable on June 30 and December 31. Branson records interest ...

The ryde and rowe inc had the following account balances as

The Ryde and Rowe Inc. had the following account balances as of January 1: Direct Materials Inventory $ 8,700 Work in Process Inventory 76,500 Finished Goods Inventory 53,000 Manufacturing Overhead 0 During the month of ...

  • 4,153,160 Questions Asked
  • 13,132 Experts
  • 2,558,936 Questions Answered

Ask Experts for help!!

Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

Ask Now Help with Problems, Get a Best Answer

WalMart Identification of theory and critical discussion

Drawing on the prescribed text and/or relevant academic literature, produce a paper which discusses the nature of group

Section onea in an atwood machine suppose two objects of

SECTION ONE (a) In an Atwood Machine, suppose two objects of unequal mass are hung vertically over a frictionless

Part 1you work in hr for a company that operates a factory

Part 1: You work in HR for a company that operates a factory manufacturing fiberglass. There are several hundred empl

Details on advanced accounting paperthis paper is intended

DETAILS ON ADVANCED ACCOUNTING PAPER This paper is intended for students to apply the theoretical knowledge around ac

Create a provider database and related reports and queries

Create a provider database and related reports and queries to capture contact information for potential PC component pro