1. The capital structure for Mills Corporation is shown below. Currently, flotation costs are 13% of market value for a new bond issue and $3 per share for preferred stock. The dividends for common stock were $2.50 last year and have an estimated annual growth rate of 6%. Market prices are $1,050 for bonds, $20 for preferred stock, and $40 for common stock. Assume a 34% tax rate.
Financing Type
% of Future
Financing
Bonds (8%, $1k par, 16 year maturity)
36%
Common equity
45%
Preferred stock (5k shares outstanding, $50 par, $1.50 dividend)
19%
Total %
100%
Compute the company’s WACC.
2. The Milton Company plans to issue preferred stock. Currently, the company’s stock sells for $120. Once new stock is issued, the Milton Company would receive only $99 (due to flotation costs). The dividend rate is 12%, and the par value of the stock is $100. Compute the cost of capital of the stock to your firm. Show all work.
3. The Dayton Corporation is considering a new investment, which would be financed from debt. Dayton could sell new $1k par value bonds at a new price of $950. The bonds would mature in 15 years, and the coupon interest rate is 10%. Compute the after-tax cost of capital to Dayton for bonds, assuming a 34% tax rate. Show work.
4. Farrah Corporation is considering two projects (see below). For your analysis, assume these projects are mutually exclusive with a required rate of return of 12%.
Project 1
Project 2
Initial investment
$185,000
$1,100,000
Cash inflow Year 1
$230,000
$1,450,000
Compute the following for each project:
NPV (net present value)
PI (profitability index)
IRR (internal rate of return)
Which project should be selected? Why?
The post 1. The Capital Structure For Mills Corporation Is Shown Below. Currently, Flotation Costs Are 13% Of Market Value For A New Bond Issue And $3 Per Share For Preferred Stock. appeared first on Versed Writers.
