Finance and Par Value

It has decided to issue a $1,000 par value bond with an 7. 7% annual coupon rate and a 10-year maturity. Investors require a 10. 7% rate of return. A. Compute the market value of the bonds. B. How many bonds will the firm have to issue to receive the needed funds? C. What is the firm’s after-tax cost of debt if the firm’s tax rate is 34%? 19. Sincere Stationery Corporation needs to raise $487,000 to improve its manufacturing plant. It has decided to issue a $1,000 par value bond with a 10. 3% annual coupon rate and a 5-year maturity. The investors require a 8. 3% rate of return. A.

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Compute the market value of the bonds. What is the firm’s after-tax cost of debt if its tax rate is 34%. 20. The target capital structure for CM Industries is 39% common stock, 9% preferred stock, and 52% debt. If the cost of common equity for the firm is 17. 7%, the cost of preferred stock is 10. 6%, the before-tax cost of debt is 7. 8%, and the firm’s tax rate is 35%, what is Ism’s weighted average cost of capital? 21. In the spring of last year Tempe Steel learned that the firm would need to re-evaluate the company’s weighted average cost of UAPITA following TA significant issue of debt.

The firm now has financed 49% of its assets using debt and 51% using equity. Calculate the firm’s weighted average cost of capital where the firm’s borrowing rate on debt is 8. 8%, it faces a 35% tax rate, and the common stockholders require a 20. 3% rate of return. 22. Krypton Electronics $1,000 par value, 5. 9% bonds that mature in 15 years and pay annual interest will sell for $971. Common stock of the firm is currently selling for $29. 81 per share and the firm expects to pay a $2. 26 dividend next year. Dividends have grown at the rate of . 6 % per year and are expected to continue to do so for the foreseeable future.

The firm plans on financing the expansion through the retention of $147 million in firm earnings and by borrowing the remaining $61 million. In return for helping sell the $61 million in new debt, the firm’s investment banker charges a fee of 300 basis points (where one basis point is . 01 %). If Faraway decides to adjust for these flotation costs by adding them to the initial outlay, what will the initial outlay for the project be? 28. The Pandora Internet Radio Company was started in 2000 to provide a personalized radio listening experience over your computer or phone and is privately owned.

However, its success could easily lead its owners to take the company public with the sale of common stock to the public. When companies sell common stock for the first time the flotation cost can be very high. If Pandora needs $77 million to finance an acquisition and sells shares to the public, how much stock would they have to sell if flotation costs are expected to be 19%? 29. Two-Foot Tools, Inc. Sells and distributes work footwear and other clothing for people who work under extreme cold conditions such s in the Arctic or Antarctica.

The company recently borrowed $14 million from a consortium of banks and agreed to pay 9. 6% interest before considering taxes of 30%. The banks also charged the firm a fee of 2. 7% of the issue to make all the arrangements. The firm plans to invest a total of $27 million in a new distribution facility and will finance the remainder using cash from prior years’ retained earnings. Given the firm’s plans, what should the initial outlay for the plant expansion be if flotation costs are accounted for by adjusting the initial outlay?