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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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Jarrod Robel
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28 Sep 2019

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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. Mary Simpson who is an assistant to Leigh Jones, the financial vice president is asked to estimate Harry Davis

I need the answers to the mini case on Chapter 9. The textbook solutions doesnt have anything posted yet. I need questions C-1,D-3,E 1-2, F,G,H,L, and O.

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.

Question 3 5 pts

Part C) What is the cost of preferred stock?

Question 4 5 pts

Part D) Using CAPM, what is the cost of equity?

Question 5 5 pts

Part E) Using DCF, what is the cost of equity?

Question 6 5 pts

Part E) If you had used ROE to calculate the growth rate in place of the given growth rate, what would the ROE-based growth rate be? (Note: ROE (return on equity) is the amount of profits earned per year on the shareholders' equity. If no dividends were paid out and the company was earning an ROE of 10%, then the entire 10% would be reinvested in the company each year. Consequently, we would expect the equity to grow at 10% per year. If, however, we paid out 70% of our earnings to our shareholders, we would only have 30% of those profits left to grow with. Consequently, we would expect the equity to grow by 3% per year (10% ROE x 30% retained.)

Question 7 5 pts

Part F) Using the bond premium method, what is the cost of equity?

Question 8 5 pts

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.

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 _______

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