Assignment
1. Dinklage Corp. has 4 million shares of common stock outstanding. The current share price is $83, and the book value per share is $8. The company also has two bond issues outstanding. The first bond issue has a face value of $90 million, a coupon rate of 6 percent, and sells for 98 percent of par. The second issue has a face value of $60 million, a coupon rate of 7 percent, and sells for 106 percent of par. The first issue matures in 21 years, the second in 3 years.
Suppose the most recent dividend was $5.50 and the dividend growth rate is 5 percent. Assume that the overall cost of debt is the weighted average of that implied by the two outstanding debt issues. Both bonds make semiannual payments. The tax rate is 35 percent. What is the company's WACC? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
2. You are given the following information for Watson Power Co. Assume the company's tax rate is 35 percent.
Debt: 6,000 6.7 percent coupon bonds outstanding, $1,000 par value, 25 years to maturity, selling for 103 percent of par; the bonds make semiannual payments.
Common stock: 390,000 shares outstanding, selling for $57 per share; the beta is 1.13.
Preferred stock: 17,000 shares of 4 percent preferred stock outstanding, currently selling for $77 per share.
Market: 6 percent market risk premium and 4.7 percent risk-free rate.
What is the company's WACC?
3. We are evaluating a project that costs $732,000, has a six-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 55,000 units per year. Price per unit is $60, variable cost per unit is $30, and fixed costs are $640,000 per year. The tax rate is 35 percent, and we require a return of 12 percent on this project. Suppose the projections given for price, quantity, variable costs, and fixed costs are all accurate to within ±10 percent.
Calculate the best-case and worst-case NPV figures. (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations and round your final answers to 2 decimal places, e.g., 32.16.)
4. Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.94 million. The fixed asset falls into the three-year MACRS class. The project is estimated to generate $2,160,000 in annual sales, with costs of $839,000. The project requires an initial investment in net working capital of $380,000, and the fixed asset will have a market value of $250,000 at the end of the project.
If the tax rate is 34 percent, what is the project's Year 0 net cash flow? Year 1? Year 2? Year 3? (MACRS schedule) (Enter your answers in dollars, not millions of dollars, e.g. 1,234,567. Negative amounts should be indicated by a minus sign. Do not round intermediate calculations and round your final answers to 2 decimal places, e.g., 32.16.)
5. Hickock, Inc., is proposing a rights offering. Presently there are 800,000 shares outstanding at $48 each. There will be 160,000 new shares offered at $40 each.
a. What is the new market value of the company?
b. How many rights are associated with one of the new shares? (Do not round intermediate calculations.)
c. What is the ex-rights price?
d. What is the value of a right?