See Attached. Please include all work.


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See Attached. Please include all work. . Finance2.docx 1. 2. 3. Chelsea Fashions is expected to pay an annual dividend of $1.00 a share next year. The market price of the stock is $27.00 and the growth rate is 4 percent. What is the firm’s cost of equity? Southern Home Cookin’ just paid its annual dividend of $.70 a share. The stock has a market price of $34 and a beta of 0.9. The return on the U.S. Treasury bill is 4 percent and the market risk premium is 13 percent. What is the cost of equity? Grill Works and More has 7 percent preferred stock outstanding that is currently selling for $42 a share. The market rate of return is 10 percent and the firm’s tax rate is 33 percent. What is the firm’s cost of preferred stock? 4. Waller, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 10 years to 5. maturity that is quoted at 99 percent of face value. The issue makes semiannual payments and has an embedded cost of 10 percent annually. Note the embedded cost refers to the coupon rate. (a) What is the company’s pretax cost of debt? (Do not round your intermediate calculations.) (b) If the tax rate is 36 percent, what is the aftertax cost of debt? (Do not round your intermediate calculations.) Consider the following information for Evenflow Power Co., Debt: Common stock: Preferred stock: Market: 5,500 7 percent coupon bonds outstanding, $1,000 par value, 20 years to maturity, selling for 105 percent of par; the bonds make semiannual payments. 121,000 shares outstanding, selling for $60 per share; the beta is 1.16. 18,500 shares of 6 percent preferred stock outstanding (note: multiply this percentage in decimal format times 100 to get the dividend), currently selling for $108 per share. 8 percent market risk premium and 5 percent riskfree rate. Assume the company’s tax rate is 35 percent. Required: Find the WACC. (Do not round your intermediate calculations.) 6. Southern Alliance Company needs to raise $26 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 60 percent common stock, 10 percent preferred stock, and 30 percent debt. Flotation costs for issuing new common stock are 13 percent, for new preferred stock, 7 percent, and for new debt, 4 percent. What is the true initial cost figure Southern should use when evaluating its project? (Do not round your intermediate calculations.) 7. 8. Convert a debt/equity ratio of 0.5 into the debt capital structure weight and equity capital structure weight Kelso Electric is debating between a leveraged and an unleveraged capital structure. The all equity capital structure would consist of 27,000 shares of stock. The debt and equity option would consist of 15,000 shares of stock plus $250,000 of debt with an interest rate of 7 percent. What is the break-even level of earnings before interest and taxes between these two options? Ignore taxes. (Please note that because of rounding you will not get the exact answer). 9. L.A. Clothing has expected earnings before interest and taxes of $2,100, an unlevered cost of capital of 13 percent and a tax rate of 34 percent. The company also has $2,600 of debt that carries an 8 percent coupon. The debt is selling at par value. What is the value of this firm? 10. James Corporation is comparing two different capital structures: an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the company would have 127,500 shares of stock outstanding. Under Plan II, there would be 51,000 shares of stock outstanding and $1.275 million in debt outstanding. The interest rate on the debt is 10 percent, and there are no taxes. (a) If EBIT is $170,000, Plan I’s EPS is $ while Plan II’s EPS is $. (Do not include the dollar signs ($). Round your answers to 2 decimal places. (e.g., 32.16)) (b)If EBIT is $574,000, Plan I’s EPS is $ and Plan II’s EP

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