Math Problems - Speech or Presentation Example

Math Problems Math Problems Q The target capital structure for QM Industries is 36% common stock, 8% preferred stock, and 56% debt. If the cost of common equity for firm 17.4%, the cost of preferred stock is 10.1%, the before-tax cost of debt is 7.4%, and the firm’s tax rate is 35%, what is QM’s weighted average cost of capital (WACC)? (Joshi, 2003)Where:Re = cost of equity = 17.4Rd = cost of debt = 56E = market value of the firms equity = 35D = market value of the firms debt = 8V = E + D = 43E/V = percentage of financing that is equity = 10.

1/43D/V = percentage of financing that is debt = 7.4/43 (WACC = (17.4/43)*10.1 + (7.4/43)*56*(1 – 1/8)4.0870 + 9.6372*(1- 0.125) = 4.0870 + 7.05255 = 12. 520%Q. 2: Crypton Electronics has a capital structure consisting of 38% common stock and 62 debts. A debt issue of $1,000 per value, 5.9% bonds that mature in 15 years and pay annual interest will sell for $980. Common stock of the firm is currently selling for $30.21 per share and the firm expects to pay a 42.35 dividend next year. Dividends have grown at the rate of 4.

8% per year and are expected to continue to do so for the foreseeable future. What is Crypton’s cost of capital where the firm’s tax rate is 30%.After Tax Cost of Debt = Pre tax Cost of Debt * (1 - Tax Rate)After Tax Cost of Debt = 6.67% * (1 - 30%)After Tax Cost of Debt = 47% Therefore, the Crypton’s cost of capital where the firm’s tax rate is 30% = 7.432%Q. 3: as a member of Financial Department Ranch Manufacturing, your supervisor has asked you to compute the appropriate discount rate to use when evaluating the purchase of new packing equipment for the plant.

Under the assumption that the firm’s present capital structure reflects the appropriate mix of capital sources for the firm, you have determined the market value of the firm’s capital structure as follows. To finance the purchase, Ranch manufacturing will sell 10-year bonds paying 6.6% per year at the market price of $1,028. Preferred stock paying a $2.05 dividend can be sold for $25.01. Common stock for Ranch Manufacturing is currently selling for $54.41 per share and the firm paid a 3.08 dividend last year.

Dividends are expected to continue growing at a rate of 3.5% per year into the indefinite future. If the firm’s tax rate is 30%, what discount should you use to evaluate the equipment purchase?= 6.49%Q4. What is the Jowers’ cost of capital? = 13.914%Q5. If the firm’s tax rate is 30%, what discount rate should you use to evaluate the equipment purchase? = 6.49Q6. The EBIT indifference level associated with the two financial plans? = $2.8mQ7. The EBIT indifference level associated with the two financial plans? = $2.4mReferencesTop of FormJoshi, M. S. (2003).

The concepts and practice of mathematical finance. Cambridge: Cambridge University Press. Bottom of Form