Attachment # 00000886 - FN300_Unit_8_Assignment.xlsx
FN300_Unit_8_Assignment.xlsx (27.57 KB)
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Debt: Book Valueof DebtNumber of Bonds IssuedBond Face Value =XMarket Value (PMTPVFA(k,n) +FVxPVF(k,n)) Xk =n =Preferred:Book Value ofPreferred StockFace ValuePreferred Stock IssuedMarket Value ofPreferredDividend (Dp)/Market Rate (k)) Stock IssuedEquity:CommonIssueRetainedEquityStock issuedPrice+EarningsMarketCapital Structure Comparison:Target WeightWeightsDebt totalComments:Based on Book ValuesBased on Market ValuesValue from aboveWeight%Cost Market Tax ofyield( 1 -Rate (kd)(T)Cost ofFloatationRateStock(Kp) (f)CAPM:Risk FreeReturn-) Xbeta(krf)Dividend Growth:LatestGrowthDividendX ( 1 +) /) +gP0Risk Premium:BondYieldPremiumkdrpeEstimate the cost of equity raised through the sale of new stock using the dividend growth approachCost of New) ) / (( 1 -) X) ) / (TargetCostFactorsCommon EquityWACC(km)(bx)(D0)Reconciliation (Average)Taunton Construction Inc.'s capital situation is described as follows:Find the firm's capital structure based on book and market values, and compare with the target capital structure. Tip: You may wish to print off this page for reference as you work through the problems.The bonds carry a coupon rate of 14% and are now selling to yield 10%.The firm issued 10,000 25-year bonds 10 years ago at their par value of $1,000. Debt:Preferred Stock: 30,000 shares of preferred stock were sold six years ago at a par value of $50. The shares pay a dividend of $6 per year. Similar preferred issues are now yielding 9%.Taunton was initially financed by selling 2 million shares of common stock at $12.Accumulated retained earnings are now $5 million. The stock is currently selling at $13.25.Taunton's Target Capital Structure is as follows:Debt Additional information for Taunton is as follows:Marginal tax rate is 40%Flotation costs average 12%Short-term treasury bills currently yield 7.5%The market is returning 12.5%Taunton's beta is 1.2The last annual dividend paid was $1.00 per shareThe firm is expected to grow at 6% indefinitelyTaunton expects to earn $5 million next yearThe firm can borrow an additional $2M at rates similar to the market return on its old debt.Beyond that, lenders are expected to demand returns of 14%.Taunton has the following capital budgeting projects under consideration in the coming year.These represent its investment opportunity schedule (IOS).ProjectIRRCapital RequiredABCDE$3 million$2 millionTip: You are strongly encouraged to follow the Concept Connections in Chapter 13.Calculate the cost of debt based on the market return on the company's existing bonds.Calculate the cost of preferred stock based on the market return on the company's existing preferred stock.Then, reconcile these three methods into a single estimate by averaging them.Calculate the cost of retained earnings using three approaches: CAPM, dividend growth, and risk premium.Calculate the WACC by using equity from retained earnings based on your component cost estimatesfrom above and the target capital structure of 30% debt, 5% preferred stock, 65% common equity.Dividends:Dividendsper shareTotal BreakpointCalculate the WACC after the first breakpoint.Where is the first breakpoint in the MCC (the point where retained earnings runs out)?AdditionalLending AvailableWhere is the second breakpoint in the MCC (the point at which the cost of debt increases)?Calculate the WACC after the second break. Using Figure 13-2 as an example, construct the IOS and MCC for Taunton.Find the new cost of debt after this breakpoint.NewYield onnew debt$1M$2M$3M$4M$5M$6M$7M$8M$9M$10M$11M$12MTip: Use Insert > Shapes to make boxes and lines.Which projects should be accepted and which should be rejected? Do any of those rejected have IRRs above the initial WACC? Which ones?If so, explain in words why they're being rejected. Using the information below, answer all questions on Tabs A through E.Scroll down on each tab to be sure you are seeing all the questions.Next year'sAlternative Method:Bond Price using Excel PV formula4% Risk
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