1.The target capital structure for QM Industries is 36 percent common stock, 7 percent preferred stock, and 57 percent debt. If the cost of equity for the firm is 17.4 percent, the cost of preferred stock is 9.2 percent, the before-tax cost of debt is 8.5 percent, and the firm’s tax rate is 35 percent, what is QM’s weighted average cost of capital?
2.Crypton Electronics has a capital structure consisting of 44% common stock and 56% debt. A debt issue of $1,000 par value, 6.3% bonds that mature in 15 years and play annual interest will sell for $970. Common stock of the firm is currently selling for $29.95 per share and the firm expects to pay a $2.32 dividend next year. Dividends grown at the rate of 5.3% per year and are expected to continue to do so for the foreseeable future. What is Crypton’s cost of capital where the firm’s tax rate is 30%?
3. The target capital structure for Jowers Manufacturing is 54 percent common stock, 10 percent preferred stock, and 36 percent debt. If the cost of equity for the firm is 20.2 percent, the cost of preferred stock is 11.2 percent, and the before-tax cost of debt is 10.8 percent, what is Jower’s cost of capital? The firm’s marginal tax rate is 34 percent.
4. As a member of the Finance department of Ranch Manufacturing, your supervisor has asked you to compute the appropriate discount rate to use when evaluating the purchase of new packaging equipment for the plant. Under the assumption that the firm’s present capital structure reflects the appropriate mix of capital sources for the firm, you have determined the market value of the firm’s capital structure as follows:
Source of Capital Market Values
Bonds $4,400,000
Preferred stock $1,900,000
Common Stock $5,500,000
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