1. Your company received a $7 million order on the last day of the year. You filled the order with $3 million worth of inventory. The customer picks up the order the same day and pays $2 million up front in cash; you also issue a bill for the customer to pay the remaining balance of $5 million within 40 days. Suppose your firm’s tax rate is 0% (ignore taxes). Determine the consequences of this transaction for each of the following:
2. Concord Motors has a cost of debt of 6.5%, a cost of equity of 12%, and a cost of preferred stock of 8.4%. The firm has 200,000 shares of common stock outstanding at a market price of $42 a share. There are 10,000 shares of preferred stock outstanding at a market price of $30 a share. The bond issue has a total face value of $500,000 and sells at 102% of face value. The tax rate is 34%. What is the weighted average cost of capital for Concord Motors?
11.74% 11.95% 11.46% 11.18% 10.83%