13 May Western Electric has 21,000 shares of common stock outstanding at a price per share of $61 and a rate of return of 15.6 percent
Western Electric has 21,000 shares of common stock outstanding at a price per share of $61 and a rate of return of 15.6 percent. The firm has 11,000 shares of $8 preferred stock outstanding at a price of $48 a share. The outstanding debt has a total face value of $275,000 and currently sells at104 percent of face. The yield to maturity on the debt is 8.81 percent.
What is the firm’s weighted average cost of capital if the tax rate is 35 percent?
Ellinger Inc. is a mature company in a mature industry. It plans to distribute all of its income at year-end, and its earnings are not expected to grow. The CFO is now considering whether the firm should distribute income to stockholders as dividends or use the funds to repurchase common stock. She believes the P/E ratio would not be affected by a repurchase of shares. Moreover, she believes that the stock can be repurchased at the end of the year at the then-current price, which is expected to be the now-current price plus the dividend that would otherwise be received at year-end.
The Net Income for the coming year is expected to be $625,000. Currently, the firm has 100,000 shares outstanding, and the current stock price is $130 per share.
Based on the data and disregarding any possible tax effects, how much would a stockholder who owns 100 shares gain if the firm used its net income to repurchase stock rather than pay a cash dividends?
A company is planning the financing of a major expansion. It will use common stock, debt or preferred stock to fund this expansion.
The company currently has 300,000 shares, outstanding and selling at an average of $130 per share.
It could sell an additional 50,000 shares to bring in an estimated $5 million.
The company could issue $5 million of 10% preferred stock. It could also issue $5 million of 9% debt.
The new project is expected to raise EBIT by 18% when implemented.
The company’s capital structure contains long term debt of $10 million which pays interest of 11%.
Current Income Statement
Net Sales
66,000,000
COGS
42,000,000
Gross Profits
24,000,000
S and A Expenses
9,300,000
Operating Profits
14,700,000
Interest on Debt
1,100,000
EBT
13,600,000
Taxes at 34%
4,600,000
EAT
9,000,000
Develop an analysis of EPS and show the effect of any dilution of shareholder earnings if any, from each source of financing.
By how much must the after-tax income increase to pay for each source of financing?
NBM has $2 million of extra cash. It has two choices to make use of the cash. One alternative is to invest the cash in financial assets. The resulting investment income will be paid out as a special dividend at the end of three years. In this case, the firm can invest in Treasury bills yielding 7%, or an 11% preferred stock. The tax law says only 30% of the dividend from the preferred stock investment would be subject to the corporate income tax. Another alternative is to pay out the cash as dividends and let the shareholders invest on their own in T-bills with the same yield. The corporate tax rate is 35%, and the individual tax rate is 31%.
Should the cash be paid today or in three years?
Which of the options generates the highest after-tax income for shareholders?
Sutton Corporation, which has a zero-tax rate due to tax loss carry-forwards, is considering a 5-year, $6,000,000 bank loan to finance service equipment. The loan has an interest rate of 10% and would be amortized over 5 years, with 5 end-of-year payments. Sutton can also lease the equipment for 5 end-of-year payments of $1,790,000 each.
How much larger or smaller is the bank loan payment than the lease payment?
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