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Chapter 12: Problem 5
The stock of Alpha Tool sells for $10.25 per share. Its current dividend rate, Do, is $1 per share. Analysts and investors expect Alpha to increase its dividends at a 10 percent rate for each of the next two years. This annual dividend growth rate is expected to decline to 8 percent in years 3 and 4 and then to settle down to 4 percent per year forever. Calculate the cost of internal equity for Alpha Tool.
Chapter 13: Problem 5
Piedmont Instruments Corporation has estimated the following costs of debt and equity capital for various fractions of debt in its capital structure.
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a. Based on these data, determine the company’s optimal capital structure (1) with financial distress costs and without agency costs and (2) with financial distress and agency costs.
b. Suppose the company’s actual capital structure is 50 percent debt and 50 percent equity. How much higher is ka at this capital structure than at the optimal value of ka with financial distress and agency costs?
c. Is it necessary in practice for the company to know precisely its optimal capital structure? Why?
Chapter 14: Problem 7
McGee Corporation has fixed operating costs of $10 million and a variable cost ratio of 0.65. The firm has a $20 million, 10 percent bank loan and a $6 million, 12 percent bond issue outstanding. The firm has 1 million shares of $5 (dividend) preferred stock and 2 million shares of common stock ($1 par). McGee’s marginal tax rate is 40 percent. Sales are expected to be $80 million.
a. Compute McGee’s degree of operating leverage at an $80 million sales level.
b. Compute McGee’s degree of financial leverage at an $80 million sales level.
c. If sales decline to $76 million, forecast McGee’s earnings per share.
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