Ask Question, Ask an Expert

+1-415-315-9853

info@mywordsolution.com

Ask Basic Finance Expert

problem1: The comfort corporation manufactures sofas and tables for the recreational vehicle market. The firm's capital structure consists of 60% common equity, 10 percent preferred stock, & 30% long term debt. This capital structure is believed to be optimal. Comfort will require 120 million dollar to finance expansion plans for the coming year. The firm expects to generate enough internal equity to meet the equity portion of its expansion needs. The cost of retained earnings is 18%. The firm can raise preferred stock at a cost of 15 percent. First-mortgage bonds can be sold at a pre tax cost of 14 percent. The firm's marginal tax rate is 40%.

find out the cost of capital for the funds needed to meet the expansion goal.

problem 2: Rolodex Inc would like to estimate its average cost of capital for the coming year. The capital budgeting plans call for funds totaling $200 million for the coming year. These funds will be raised from long term debt, preferred stock, and common equity in the same proportions as their book values in the firm's balance sheet as shown below:

Rolodex Inc Balance Sheet [in millions of dollars]

Current Assets

$110

Accounts Payable

30

Fixed Assets

260

Other Current Liabilities

20

Total Assets

370

Long-term debt

128

 

 

Preferred Stock

32

 

 

Common Stock (20 million shares at par)

20

 

 

Contributed capital in excess of par

30

 

 

Retained earnings

110

 

 

Total Liabilities and Equity

370

Discussions between the firm's financial officers and the firm's investment and commercial bankers have yielded the following information:

Rolodex's maximum borrowing is 80 million dollar from its bank at a pretax cost of 13 percent

Preferred stock can be issued at a pretax cost of 16.5 percent

Rolodex expects to generate 140 million dollar in net income. Any earnings remaining after meeting the equity portion of the $200 million capital expenditure budget will be paid out as dividends

The risk-free rate of return is 5.5% the market risk premium is assumed to equal 10% and Rolodex's beta is estimated to be 1.2

Rolodex's marginal tax rate is 40 percent

find out Rolodex's weighted average cost of capital for the coming year.

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M919116

Have any Question? 


Related Questions in Basic Finance

A research concludes that the number of hours of exercise

A research concludes that the number of hours of exercise per week for adults is normally distributed with a mean of 3.5 hours and a standard deviation of 3 hours. (a) Find the 75th percentile for the distribution of exe ...

1 when should investors invest in money market securities2

1. When should investors invest in money market securities? 2. List the reasons for investing in Treasury securities (notes and bonds). 3. What are the advantages of inflation-indexed Treasury securities?

1 define a multinational corporation mnc what additional

1. Define a multinational corporation (MNC). What additional factors must be considered by the manager of an MNC that a manager of a purely domestic firm is not forced to face? 2. Who are the major players in foreign cur ...

The cost of capital weighted average cost of capitalthe

The Cost of Capital: Weighted Average Cost of Capital The firm's target capital structure is the mix of debt, preferred stock, and common equity the firm plans to raise funds for its future projects. The target proportio ...

1 what factors should an investor consider when trying to

1. What factors should an investor consider when trying to decide whether to dispose of a property that he has owned for several years? 2. What causes the marginal rate of return to change over time? How can the marginal ...

Boeing is using world-class manufacturing facilities in

Boeing is using world-class manufacturing facilities in Japan to supply components for its new Dreamliner. Should Boeing consider building production plants in countries like India and China, where there are many excelle ...

Explain why interest rate swaps are more widely used than

Explain why interest rate swaps are more widely used than currency and equity swaps? Explain how swaps are similar to but different from forward contracts ? Suppose that a party engages in a swap, but before the expirati ...

As mentioned in the chapter during early 2010 investors

As mentioned in the chapter, during early 2010, investors began to worry that the government of Greece might default on its bonds. The rating agencies downgraded Greek bonds several times. Following one of the rating dow ...

1 the common stock of buildwell construction has a beta of

1) The common stock of Buildwell Construction has a beta of 0.90. The T-bill rate is 4% and the market risk premium is estimated at 8%. Buildwell's capital structure is 30% debt, paying a 5% interest rate and 70% equity. ...

1 credit report what are the six major areas of information

1. Credit Report. What are the six major areas of information that may be included on your credit report? 2. Credit Score. What factors determine your credit score and how are these factors weighted by FICO? 3. Vantage S ...

  • 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