BUSINESS COLLEGE

If Wild Widgets, Inc., were an all-equity company, it would have a beta of .95. The company has a target debt-equity ratio of .40. The expected return on the market portfolio is 11 percent and Treasury bills currently yield 3.5 percent. The company has one bond issue outstanding that matures in 15 years and has a coupon rate of 6.5 percent. The bond currently sells for $1,080. The corporate tax rate is 21 percent.Required:
a. What is the company's cost of debt?
b. What is the company's cost of equity?
c. What is the company's weighted average cost of capital?

Answers

Answer 1

Answer:

Answer:

see explanation

Explanation:

a. The company's cost of debt

Cost of Debt = Total after tax cost

b. The company's cost of equity?

Cost of equity = Return from risk free + Beta x Market Premium

c. The company's weighted average cost of capital

weighted average cost of capital = Weighted Cost of Debt + Weighted Cost of Equity

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Bad Boys, Inc. is evaluating its cost of capital. Under consultation, Bad Boys, Inc. expects to issue new debt at par with a coupon rate of 8% and to issue new preferred stock with a $2.50 per share dividend at $25 a share. The common stock of Bad Boys, Inc. is currently selling for $20.00 a share. Bad Boys, Inc. expects to pay a dividend of $1.50 per share next year. An equity analyst foresees a growth in dividends at a rate of 5% per year. The Bad Boys, Inc. marginal tax rate is 35%. If Bad Boys, Inc. raises capital using 45% debt, 5% preferred stock, and 50% common stock, what is Bad Boys, Inc.’s cost of capital?

Answers

Answer:

Ans. Bad Boys, Inc.’s cost of capital = 9.09%

Explanation:

hi, we need to find the cost of all the debt instruments of the problem, let´s start by stating that the cost of hte tax-deductable debt is 8% (equals to the coupon rate of the bond).

Preffered Stock

In order to find the cost of the preffered stock, we need to use the following formula.

$Cost P.Stock =(Dividend)/(Price) =(2.5)/(25)=0.1$

Cost of Preffered Stock= 10%

Common Stock

To find the cost of the common stocks, we have to use the following formula.

$CommonStock=(Div1+Price*GrowthRate)/(Price)$

$CommonStock=(1.5+20*0.05)/(20) =0.125$

Common Stock Cost = 12.5%

If tax rate is 35%, the cost of capital of Bad Boys, Inc is found by using the following formula.

$CostCapital=Bond(CostBond)(1-T)+P.Stock(costP.Stock)+C.Stock(Cost.C.Stock)$

$CostCapital=0.45(0.08)(1-0.35)+0.05(0.1)+0.5(0.125)=0.0909$

The cost of capital is =9.09%

Best of luck.

Final answer:

The cost of capital for Bad Boys, Inc., considering their mixed financing strategy and marginal tax rate, is calculated to be approximately 9.09%. The calculation considers the costs of debt, preferred stock, and common equity, all weighted according to their proportion in the capital structure.

Explanation:

To calculate Bad Boys, Inc.’s cost of capital, we must compute the costs of debt, preferred stock, and common stock, then weight them according to their proportions in the firm's capital structure. The cost of debt (interest rate) is 8%, but because interest expense is tax deductible, we multiply this by 1 minus the tax rate: 8% * (1 - 35%) = 5.2%. The cost of preferred stock (dividend rate) is the dividend divided by the price per share: $2.50 / $25 = 10%. For common stock, we use the Gordon Growth Model to find the cost of equity: (next year’s dividend / current stock price) + growth rate of dividends: ($1.50 / $20) + 5% = 12.5%.

Now, we must weight these costs according to the proportions of capital: 5.2% * 45% (debt) + 10% * 5% (preferred stock) + 12.5% * 50% (common equity) = 2.34% + 0.5% + 6.25% = 9.09%. Thus, Bad Boys, Inc.'s cost of capital is estimated to be 9.09%. Understanding this concept allows companies to make informed decisions about future investments and financial management practices.

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Wahoo just issued preferred stock at a semiannual dividend of $2 per share. If you have an annual discount rate as an investor of 8%, how much the price of the preferred stock should be

Answers

Answer:

The price of the preferred stock should be $ 50.

Explanation:

Price of the issued preferred stock: semianual dividend of $2 per share.

Annual discount rate: 8%

With these details we are able to perfom the following calculations:

Annual Preferred Dividend = Semi Annual Dividend x 2

= $2.00 x 2 = $4.00 per share

Then we know that the Price of Preferred Stock = Annual Dividend per share on Preferred Stock / Discount Rate

So this is= $4.00 per share / 0.08

= $50.00 per share. Price of the preferred stock

To decrease the money supply, the Federal Reserve could a. decrease the required reserve ratio. b. conduct an open market purchase of U.S. Treasury securities. c. increase the discount rate. d. forbid the reselling of U.S. Treasury securities.

Answers

Answer: c. increase the discount rate.

Explanation:

The discount rate of a country is the rate at which the central bank in that country loans money out to the financial institutions.

When this rate is low, more financial institutions will borrow money as opposed to when it is high. Banks borrowing money increases the money supply in the economy so if the Federal Reserve wants to reduce money supply, it should increase the discount rate which would dissuade banks from borrowing from the Fed thereby limiting money supply.

Mixed Costs and Cost Formula Ben Palman owns an art gallery. He accepts paintings and sculpture on consignment and then receives 20% of the price of each piece as his fee. Space is limited, and there are costs involved, so Ben is careful about accepting artists. When he does accept one, he arranges for an opening show (usually for 3 hours on a weekend night) and sends out invitations to his customer list. At the opening, he serves wine, soft drinks, and appetizers to create a comfortable environment for prospective customers to view the new works and to chat with the artist. On average, each opening costs $600. Ben has given as many as 20 opening shows in a year. The total cost of running the gallery, including rent, furniture and fixtures, utilities, and a part-time assistant, amounts to $120,000 per year.Required:1. Assume that the cost driver is number of opening shows. Develop the cost formula for the gallery's costs for a year.
2. Using the cost formula developed above, what is the total cost for Ben in a year with 12 opening shows?
$
Using the cost formula developed above, what is the total cost for Ben in a year with 14 opening shows?
$

Answers

Answer:

$136,200 is the total costs for 14 opening shows

Explanation:

See attached file

Photo Frame Company had beginning Work in Process inventory of 1,200 units. There were 3,300 units of product started during the period. Ending Work in Process inventory consisted of 1,500 units that were 50% complete. The total dollar cost associated with production of inventory was $88,000. The cost per equivalent whole unit would be which of the followingA. $51
B. $34
C. $45
D. $37

Answers

Answer:

$23.47

Explanation:

Given that,

Beginning Work in Process inventory = 1,200 units

Units started = 3,300 units

Ending Work in Process = 1,500 units

Total dollar cost = $88,000

Finished units:

= Beginning Work in Process inventory + Units started - Ending Work in Process

= 1,200 units + 3,300 units - 1,500 units

= 3,000 units

Equivalent units:

= (Finished units × 100%) + (Ending Work in Process × 50%)

= (3,000 × 100%) + (1,500 × 50%)

= 3,000 units + 750 units

= 3,750 units

Cost per equivalent whole unit:

= Total dollar cost ÷ Equivalent units

= $88,000 ÷ 3,750

= $23.47

The sales of Carephase Company for the year are as given below: Quarter 1 $400,000 Quarter 2 $360,000 Quarter 3 $620,000 Quarter 4 $580,000 Fifty percent of the sales of the company are paid in cash. Of the sales on account, 60 percent are collected in the quarter of sale, the remaining 40 percent are collected in the quarter following the sale. Calculate the cash receipts for Quarter 4.