Hydroklean ,LLC Soil Cleaning Company Assignment Help
1. Hydroklean ,LLC an environmental soil cleaning company, borrowed $.5 milliontio finance startup costs for a sitereclamanation project. How much must the company receive each year in revenue to earn a rate of 20% per year for the 5 year project period ?
2.Coleman Technologies is considering a major expansion program that has been proposed by the company’s information technology group. Before proceeding with the expansion, the company must estimate its cost of capital. Assume that you are an assistant to Jerry Lehman, the financial vice president. Your first task is to estimate Coleman’s cost of capital. Lehman has provided you with the following data, which he believes may be relevant to your task.
(1) The firm’s tax rate is 40%.
(2) The current price of Coleman’s 12% coupon, semiannual payment, noncallable bonds with 15 years remaining to maturity is $1,153.72. Coleman does not use short-term interest-bearing debt on a permanent basis. New bonds would be privately placed with no flotation cost.
(3) The current price of the firm’s 10%, $100.00 par value, quarterly dividend, perpetual preferred stock is $111.10.
(4) Coleman’s common stock is currently selling for $50.00 per share. Its last dividend (D0) was $4.19, and dividends are expected to grow at a constant rate of 5% in the foreseeable future. Coleman’s beta is 1.2, the yield on T-bonds is 7%, and the market risk premium is estimated to be 6%. For the bond-yield-plus-risk premium approach, the firm uses a risk premium of 4%.
(5) Coleman’s target capital structure is 30% debt, 10% preferred stock, and 60% common equity.
To structure the task somewhat, Lehman has asked you to answer the following questions.
a.(1) What sources of capital should be included when you estimate Coleman’s WACC?
(2) Should the component costs be figured on a before-tax or an after-tax basis?
(3) Should the costs be historical (embedded) costs or new (marginal) costs?
b.What is the market interest rate on Coleman’s debt and its component cost of debt?
c.(1) What is the firm’s cost of preferred stock?
(2) Coleman’s preferred stock is riskier to investors than its debt, yet the preferred’s yield to investors is lower than the yield to maturity on the debt. Does this suggest that you have made a mistake?
d.(1) Why is there a cost associated with retained earnings?
(2) What is Coleman’s estimated cost of common equity using the CAPM approach?
e. What is the estimated cost of common equity using the DCF approach?
f. What is the bond-yield-plus-risk-premium estimate for Coleman’s cost of common equity?
g. What is your final estimate for rs?
h. Explain in words why new common stock has a higher cost than retained earnings.
i.(1) What are two approaches that can be used to adjust for flotation costs?
(2) Coleman estimates that if it issues new common stock, the flotation cost will be 15%. Coleman incorporates the flotation costs into the DCF approach. What is the estimated cost of newly issued common stock, considering the flotation cost?
j. What is Coleman’s overall, or weighted average, cost of capital (WACC)? Ignore flotation costs.
k. What factors influence Coleman’s composite WACC?
l. Should the company use the composite WACC as the hurdle rate for each of its projects? Explain.
3.ABC Corp. has 10 million shares of common stock outstanding. The common stock currently sells for $65 per share and has a beta of 0.75. The market risk premium is 8 percent and the risk-free rate is 3 percent. The company has 2 million shares of preferred stock outstanding. The preferred stock currently sells for $80 per share and pays 4 percent dividend for each $100 face value. The company also has 1 million semiannual bonds outstanding with a 6% coupon interest rate and par value $1,000 each. The bonds have 20 years to maturity and sell for 115 percent of the par. The company’s average tax rate is 35 percent. Answer the following questions. (1) Compute the cost of common equity (RE), the preferred stock (RP), and the pre-tax cost of bond (RD)? (2)What are the capital structure weights (WE, WP, and WD)?
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4.Titan Mining Corporation has 10.0 million shares of common stock outstanding, 440,000 shares of 4 percent preferred stock outstanding, and 230,000 8.8 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $48 per share and has a beta of 1.50, the preferred stock currently sells for $98 per share, and the bonds have 10 years to maturity and sell for 115 percent of par. The market risk premium is 8.8 percent, T-bills are yielding 5 percent, and Titan Mining’s tax rate is 40 percent.
What is the firm’s market value capital structure? (Round your answers to 4 decimal places. (e.g., 32.1616))
5.Organic Produce Corporation has nine million shares of common stock outstanding, 500,000 shares of 6 percent preferred stock outstanding, and 200,000 of 9.4 percent semiannual bonds outstanding, par value S1,000 each. The common stock currently sells for $64 per share and has a beta of 1.1, the preferred stock currently sells for $83 per share, and the bonds have IS years to maturity and sell for 108 percent of par. The market risk premium is 8 percent. T-bills are yielding 5.5 percent, and the firm”s tax rate is 34 percent.
a. What is the firm”s market value capital structure?
b. If the firm is evaluating a new investment project that has the same risk as the firm”s typical project, what rate should the firm use to discount the project”s cash flows?
6.Pine Tree Farms Corporation (PTFC) has a target capital structure of 40% debt, 10% preferred stock, and 50% common stock. Currently PTFC has a capital structure of 75% debt, 10% preferred stock, and 15% common stock. The after tax cost of debt is 4%. The preferred stock has a par value of $100 per share, a $7 per share dividend, and a market price of $60 per share. The common stock of PTFC trades at $86 per share and has a projected dividend (D1) of $2.55. The stock price and dividend are expected to continue to grow at 7% per year for the foreseeable future. The CFO expects the company to have $590,000 available from retained earnings.
What is PTFC’s weighted average cost of capital (WACC)?
7.A consultant has collected the following information regarding Hobbit Manufacturing:
Operating income (EBIT) $600 million, Interest expense $0, Tax rate 40%, Debt $0, Cost of equity 7%, WACC 7% . The company has no growth opportunities (g = 0), so the company pays out all of its earnings as dividends . Hobbit can borrow money at a pre-tax rate of 6%. The consultant believes that if the company moves to a capital structure consisting of 30% debt and 70% equity (based on market values), which would require taking on debt in the amount of $1,617 million, that the cost of equity will increase to 8% and the pre-tax cost of debt will remain at 6%, but the value of the firm will rise. Is the consultant correct? If the company makes this change, what will be the increase in total market value for the firm?
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