FIN Exercise
1.Being Human, Inc., recently issued new securities to finance a new TV show. The project cost $13.8 million, and the company paid $705,000 in flotation costs. In addition, the equity issued had a flotation cost of 6.8 percent of the amount raised, whereas the debt issued had a flotation cost of 2.8 percent of the amount raised. If the company issued new securities in the same proportion as its target capital structure, what is the company’s target debt-equity ratio?
2.Cully Company needs to raise $55 million to start a new project and will raise the money by selling new bonds. The company will generate no internal equity for the foreseeable future. The company has a target capital structure of 70 percent common stock, 15 percent preferred stock, and 15 percent debt. Flotation costs for issuing new common stock are 9 percent, for new preferred stock, 6 percent, and for new debt, 2 percent.
What is the true initial cost figure the company should use when evaluating its project? (Do not round intermediate calculations and enter your answer in dollars, not millions, rounded to the nearest whole dollar amount, e.g., 1,234,567.)
3.Photochronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt-equity ratio of .6. It’s considering building a new $63 million manufacturing facility. This new plant is expected to generate aftertax cash flows of $7.9 million in perpetuity. The company raises all equity from outside financing. There are three financing options:
1.A new issue of common stock: The flotation costs of the new common stock would be 7.1 percent of the amount raised. The required return on the company’s new equity is 15 percent.
2.A new issue of 20-year bonds: The flotation costs of the new bonds would be 2.6 percent of the proceeds. If the company issues these new bonds at an annual coupon rate of 6 percent, they will sell at par.
3.Increased use of accounts payable financing: Because this financing is part of the company’s ongoing daily business, it has no flotation costs, and the company assigns it a cost that is the same as the overall firm WACC. Management has a target ratio of accounts payable to long-term debt of .20. (Assume there is no difference between the pretax and aftertax accounts payable cost.)
What is the NPV of the new plant? Assume that PC has a 21 percent tax rate. (Do not round intermediate calculations and enter your answer in dollars, not millions, rounded to the nearest whole dollar amount, e.g., 1,234,567.)
4.Ying Import has several bond issues outstanding, each making semiannual interest payments. The bonds are listed in the following table.
If the corporate tax rate is 24 percent, what is the aftertax cost of the company’s debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
