1 M MGMT 2023 Financial Management 1 - Tutorial Sheet # 3 Due April 12, 2017, 11:55 PM ECT. To be posted to Moodle using the Quiz Activity Resource....

5. What is the company’s cost of equity capital if MJI’s common stock has a beta of 1.0, a risk-free rate of 6 percent and the expected return on the market is 12 percent?   (3 points)

6. Consider GRENLEC Power Co. which has the following information about its capital structures:

 Debt - 4,500 issues 6 percent coupon bonds outstanding, $1,000 par value, 7 years to maturity, selling for 93 percent of par, the bonds make semiannual payments  Common Stock - 150,000 shares outstanding, selling for $35 per share; the beta is 1.10  Preferred Stock - 80,000 shares of 6 percent preferred stock outstanding, currently selling for $95 per share  Market Information - 6 percent market risk premium and 4 percent risk-free rate.

Required: Calculate to the following if the company has a tax rate of 36 percent. 

 i. Total Market Value for the Firm   ( 3 points)

ii. After-tax cost of Debt   (3 points)

iii. Cost of Equity    (2 points)

iv. Cost of Preferred Stock   (2 points)

v. Weighted Average Cost of Capital  (3 points)

7. The total market value for Disney was $490M at the start of this year. During the year Disney plans to raise and invest $200M in new projects. The company’s present market value capital structure, shown below is considered to be optimal. Assume that there is no short-term debt.    Debt $155M; Common equity $335M; Total Capital $490M. New bonds will have an 8 percent coupon rate, and they will be sold at par. Common stock is currently selling at $55 a share and has of a dividend yield of 6 percent and an expected constant growth rate of 4 percent.   The marginal corporate tax rate is 30 percent.

a. Assume that there is sufficient cash flow such that Disney can maintain its target capital structure without issuing additional shares of equity.  i. Calculate the after-tax cost of debt.  (2 points) ii. Calculate the Cost of Equity.  (2 points) iii. What is the WACC?   (3 points)

b. To maintain the present capital structure, how much of the new investment must be financed by common equity?   (3 points)