FIN370 Financial Excel Problems

Question-1
Templeton Extended Care Facilities Inc is considering the acquisition
of a chain of cemeteries for $400 million. since the primary asset of this
business is real estate, Templeton’s management has determined that they will
be able to borrow the majority of the money needed to buy the business. The
current owners have no debt financing but Templeton plans to borrow $300 million
and invest only $100 million in equity in the acquisition. What weights should
Templeton use in computing the WACC for this acquisition? Round to one decimal
place.
The appropriate weight of debt Wd is
The appropriate weight of common equity Wcs is

Question-2
2). Compute the cost of capital for the firm for the following:
a). A bond that has a $1,000 par value (face value) and a contract or coupon
interest rate of 10.9%. The bonds have a current market value of $1,125 and
will mature in 10 years. The form’s marginal tax rate is 34% .
aa). Theafter-tax cost of debt is _% (round to two decimals places)
b). A new common stock issue that paid a $1.78 dividend last year. The firm’s
dividends are expected to continue to grow at 7.6% per year forever. The price
of the firm’s common stock is now $27.29.
bb). The cost of common equity is _% (round to two decimal places)
c). A preferred stock that sells for $146 pays a dividend of 8.2 percent and
has a $100 par value.
cc). The cost of the preferred stock is _% (round to two decimal places)
d). A bond selling to yield 11.8% where the form’s tax rate is 34%.
dd). After tax cost of debt is _% (round to two decimal places)

Question-3
(Cost of Preferred Stock) The preferred stock of Gator
Industries sells for $35.89 and pays $2.76 per year in dividends. What is the cost of preferred stock
financing? If Gator were to issue 521,000 more preferred shares just like the
ones it currently has outstanding, it could sell them for $35.89 a share but
would incur flotation costs of $2.88 per share. what are the flotation costs
for issuing the preferred shares and how should this cost be incorporated into
the NPV of the project being financed?
Question-4
(Cost of Debt) The Walgren Corporation is
contemplating a new investment to be finance using one-third from debt.
The firm could sell new $1,000 par value bonds with a 15-year maturity at a
price of $947 that carry a coupon interest rate is 12.7 % that is paid
semiannually, and the bonds would mature in fifteen years. If the company
is in a 34% tax bracket, what is the after-tax cost of capital to Walgren for
bonds?

Question-5
(Cost of Debt) Gillian Stationery Corporation
needs to raise $600,000 to improve its manufacturing plant. It has
decided to issue a $1,000 par value bond with a coupon rate of 8% with interest
paid semiannually and a 10-year
maturity. If the investors require a 10% rate of return:
a.
Compute the market value of the bonds.
b. How many
bonds will the firm have to issue to receive the needed funds?
c. What
is the firm’s after-tax cost of debt if the firm’s tax rate is 34 percent?

Question-6
(Weighted average cost of capital) As a
consultant to GBH Skiwear, you have beenasked
to compute the appropriate discount rate to use in the evaluation of the
purchase of anew warehouse facility. You have
determined the market value of the firm’s current capitalstructure (which the firm considers to be its
target mix of financing sources) as follows:
Source of Capital Market Value

Bonds $530,000
Preferred stock $120,000
Common stock $450,000
To finance the purchase, GBH will sell 20-year bonds
with a $1,000 par value paying7.9% per year
at the market price of $958. Preferred stock paying a $2.52 dividend can besold for $35.23. Common stock for GBH is currently
selling for $50.04 per share. The firmpaid a
$4.05 dividend last year and expects dividends to continue growing at a rate of 3.9% per year into the indefinite future. The firm’s
marginal tax rate is 34%. Whatdiscount rate
should you use to evaluate the warehouse project?
Question-7
Lowe’s Companies, Inc. (LOW) and its subsidiaries
operate as a home improvement retailer in the United States and Canada. As of
February 1, 2008, it operated 1,534 stores in 50 states and Canada. The
company’s balance sheet for February 1, 2008, included the following sources of
financing:
In Thousands of Dollars Financial Structure
Liabilities
Current liabilities
Accounts payable ……………………….. $ 4,137,000
Short-term/current debt …………………. 1,104,000
Other current liabilities …………………. 2,510,000
Total current liabilities …………………. $ 7,751,000
Long-term debt ………………………… 5,576,000
Other long-term liabilities ……………… 670,000
Long-term liabilities ……………………. $ 6,246,000
Stockholder equity …………………….. $16,098,000
Total …………………………………… $30,095,000
a. Calculate the values of Lowe’s debt ratio and
interest-bearing debt ratio.
b. If the market value of Lowe’s common equity is $35.86
billion and Lowe’s has no excess cash, what is the firm’s
debt-to-enterprise-value ratio?

Question-8
(Computing interest tax savings) Dharma Supply has
earnings before interest and taxes (EBIT) of $511,000, interest expenses of $323,000
and faces a corporate tax rate of 34 percent.
a. What is Dharma Supply’s Net Income?
b. what would dharmas net income be if it didnt have any
debt?
c. what are the firms interest tax savings?
Question-9
You have developed the following pro forma income statement
for your corporation.
It represents the most recent years operations, which ended yesterday. Your
supervisor in the controllers office has just handed you a memorandum asking
for written responses to the following questions:
a. If Sales Should increase by 20%, by what percent would earnings before
interest and taxes and net income increase?
b. If sales should decrease by 20% by what percent would earnings before
interest and taxes and net income decrease?
c. If the firm were to reduce its reliance on debt financing such that
interest expense were cut in half, how would this affect your answers to parts
A and B?

Question-10
(Capital Asset Pricing Model) CSB, Inc has a beta of 0.765.
If the expected market return is 10.5 percent and the risk free rate is 3.5
percent, what is the appropriate expected return of CSB(using the CAPM)?

Question-11
(Capital Asset Pricing Model) The expected return for the
general market is 10.5 percent, and the risk premium in the market is 7.0%.
Tasaco, LBM, and Exxos have betas of 0.828, 0.612 and 0.509, respectively. What
are the corresponding required rates of return for the three securities?

Question-12
James Fromholtz is considering whether to invest in a newly
formed investment fund. The fund’s investment objective is to acquire home
mortgage securities at what it hopes will be bargain prices. The fund sponsor
has suggested to James that the fund’s performance will hinge on how the
national economy performs in the coming year. Specifically, he suggested the
following possible outcomes:
a. Based on these potential outcomes, what is your estimate of the expected
rate of return from this investment opportunity?
b. Would you be interested in making such an investment? Note that you lose all
your money in one year if the economy collapses into the worst state or you
double your money if the economy enters into a rapid expansion.
c. Would you be interested in making such an investment?