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1. The firms tax rate is 40%
2. The current price of Colemans 12% coupon, semiannual payment,noncallable bonds with 15 years remaining to maturity is $ 1153.72.Coleman does not use short term interest bearing debt on apermanent basis. new bonds would be privately placed with noflotation cost.
3. the current price of the firms 10 % $100.00 par value, quarterlydividend, prepetual preffered stock is $111.10
4. Colemans current stock is selling for $50 per share. Its lastdividend was $4.19 and dividends are expected to grow at a constantrate of 5% in the forseeable future. Colemans beta is 1.2, theyield on T Bonds is 7% and the market risk premium is estimated tobe 6%. For the bond yield plus risk premium approach, the firm usesa risk premium of 4%.

A. 1- What sources of capital should be included when you estimatethe WACC?
2- Should the component costs be figured on a before tax or anafter tax basis?
3- Should the costs be historical costs or new costs?


B- what is the market intreest rate on colemans debt and itscomponent cost of debt

c- 1- what is the firms cost of preffered stock?

d- 1- why is there a cost associated with retained earnings?
2- what is colemans estimated cost of common equity using the CAPMapproach?

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10 Mar 2018

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During the past few years, Harry Davis Industries (HDI) has beenconstrained by high cost of capital to make many capitalinvestments. Recently, though, capital costs have been decliningand the company has decided to look seriously at a major expansionprogram that had been proposed by the marketing department. Assumethat you are an assistant to the CFO. Your first task is estimateHDI’s cost of capital. The CFO has provided you with the followingdata, which is considered to your task:

  1. The current price of HDI’s 12% coupon , seminal annual,non-callable bonds with 15 years to maturity is $1153.72. HDI doesnot use short-term interest bearing debt on a permanent basis. Newbonds would be privately placed with no flotation costs.
  2. The current price of HDI’s 10%, $100 par value, quarterlydividend, perpetual preferred stock is $113.10. HDI would incurflotation cost of $2.00 per share.
  3. HDI’s common stock is currently selling for $50 per share. Itslast dividend (d0) was $4.19, and dividends are expectedto grow at a constant rate of 5% in the foreseeable future. HDI’sbeta is 1.2; the yield on T-Bonds is 7%; and the market riskpremium is estimated to be 6%. For the bond-yield-plus-risk-premiumapproach, the firm uses a 4% point risk premium.
  4. HDI’s target capital structure:30% long-term, 10% pref. stock,and 60% common equity.
  5. The firm’s tax rate is 40%

To structure the task somewhat, CFO has asked you to answer thefollowing questions:

1. The after-tax cost of HDI’s debt, Kdis ___________

2. The firm’s cost of preferred stock,Kp, is __________

3. Using CAPM the firm’s cost of equity,Ke is _______

4. The estimated cost of equity using DiscountedCash Flow (DCF) model is ______

5. The cost of equity, Ke, based on thebond-yield-plus-risk-premium method is ____

6. The overall cost of equity, Ke is__________

7. The weighted average cost of capital (WACC) is_________

8. HDI estimates that if it issues new common stock,the flotation cost will be 15%. HDI incorporates theflotation costs into the DCF approach. The estimatedcost of newly issued common stock, taking into account theflotation cost is _________

9. Suppose HDI has historically earned 15% on equity (ROE) andretained 35% of earnings, and investors expect this situation tocontinue in the future. How could you use this information toestimate the future dividend growth rate, and what growth ratewould you get? Is thisconsistent with the 5% growth rate given?

HDI is interested in establishing a new division, which willfocus primarily on developing new internet-based projects. Intrying to determine the cost of capital for this new division, youdiscover that stand-alone firms involved in similar projects haveon average the following characteristics:

- Capital structure of 10% debt and 90% equity.

- Cost of debt of 12% and beta of 1.7.

10. Given this information, your estimate of the division’s costcapital is _______

During the last few years, Agile technologies has been too constrained by the high cost of capital to make many capital investments. Recently, though, money costs have been declining, and the company has decided to look seriously at a major expansion program that had been proposed by the marketing department. Assume that you are an assistant to the VP of Finance. Your first task is to estimate Agile's cost of capital. You have been provided with the following data, which may be relevant to your task:

The firm's tax rate is 40 percent.

The current price of Agile's 14 percent coupon, semiannual payment, noncallable bonds with 16 years remaining to maturity is $1,316.05. Agile does not use short-term interest-bearing debt on a permanent basis. New bonds would be privately placed with no flotation cost.

The current price of the firm's 10.5 percent, $100 par value, perpetual preferred stock is $116.67. Agile would incur flotation costs of $2.00 per share on a new issue.

Agile's common stock is currently selling at $42.75 per share. Its last dividend (D0) was $3.82, and dividends are expected to grow at a constant rate of 6 percent in the foreseeable future. Agile's beta is 1.26; the yield on t-bonds is 5 percent; and the market risk premium is estimated to be 5.6 percent. For the bond-yield-plus-risk-premium approach, the firm uses a 3 percentage point risk premium. Agile uses all three estimates of the cost of the common equity component in an equally weighted manner. New common stock would incur a flotation cost of 15%.

Agile's target capital structure is 30 percent long-term debt, 10 percent preferred stock, and 60 percent common equity.

The firm is forecasting retained earnings of $600,000 for the coming year.

Answer the following questions:

1. What is Agile's component cost of debt?

2. What is the firm’s cost of preferred stock?

3. What is Agile's estimated cost of retained earnings using the CAPM approach?

4. What is the estimated cost of retained earnings using the discounted cash flow (DCF) approach?

5. What is the bond-yield-plus-risk-premium estimate for Agile's cost of retained earnings?

6. What is your final estimate for Agile’s cost of retained earnings (ks)?

7. What is Agile's overall, or weighted average, cost of capital (WACC) when retained earnings are used as the equity component?

8. What happens to the cost of equity when retained earnings are used up?

9. At what amount of new investment would Agile be forced to issue new common stock?

10. What is the WACC using new common stock?

I need the rest of the questions answered. The last post didnt get all of them answered. They were supposed to be in the solutions manual.

Textbook: Corporate Finance by Michael Ehrhardt and Eugene Brigham

Mini Case – Chapter 9,

During the last few years, Harry Davis Industries has been too constrained by the high cost of capital to make many capital investments. Recently, though, capital costs have been declining, and the company has decided to look seriously at a major expansion program proposed by the marketing department. Assume that you are an assistant to Leigh Jones, the financial vice president. Your first task is to estimate Harry Davis ’ s cost of capital. Jones has provided you with the following data, which she believes may be relevant to your task:(1) The firm ’ s tax rate is 40%.(2) The current price of Harry Davis ’ s 12% coupon, semiannual payment, non callable bonds with 15 years remaining to maturity is $1,153.72. Harry Davis does not use short-term interest-bearing debt on a permanent basis. New bonds would be privately placed with no flotation cost.(3) The current price of the firm ’ s 10%, $100 par value, quarterly dividend, perpetual preferred stock is $116.95. Harry Davis would incur flotation costs equal to 5% of the proceeds on a new issue.(4) Harry Davis ’ s common stock is currently selling at $50 per share. Its last dividend(D 0 ) was $3.12, and dividends are expected to grow at a constant rate of 5.8% in the foreseeable future. Harry Davis ’ s beta is 1.2, the yield on T-bonds is 5.6%, and the market risk premium is estimated to be 6%. For the own-bond-yield-plus- judgmental-risk-premium approach, the firm uses a 3.2% risk premium.(5) Harry Davis ’ s target capital structure is 30% long-term debt, 10% preferred stock ,and 60% common equity. To help you structure the task, Leigh Jones has asked you to answer the following questions.

Part G) What is your best estimate of cost of equity?

Just use an unweighted average of the three different cost of equity numbers you have computed.

Question 9 5 pts

Part H) What is the WACC?

Question 10 5 pts

Part L) What is the division cost of equity?

Question 11 5 pts

Part L) What should be the Division WACC? (Note: The book states that the Cost of Debt is 12%. This is confusing because the book usually uses the term "Cost of Debt" as the After-Tax Cost of Debt. It this problem, the book is using 12% as the Interest Rate or Pre-Tax Cost of Debt. The WACC calculation uses the After-Tax Cost of Debt.)

*Make certain that you are using the after-tax cost of debt based on 12% interest rate.

Question 12 5 pts

Part O) What is the estimated cost of equity?

Question 13 5 pts

Part O) Assuming that the bond sells for 100, what is the cost of debt?

*Recognize that "the bond sells at 100" means that the bond sells at 100% of face value. Also, make sure that you are inputting the cost of debt and not the interest rate.

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