3) X Corporation wants to calculates its cost of capital for major expansion program which riskier than the risk level of its current operations ⚫ Tax rate=30%. • 30-year, 10% coupon, annual payment noncallable bonds sell for $1,200. New bonds will be privately placed with no flotation cost. ⚫ 10%, $100 par value, quarterly dividend, perpetual preferred stock sells for $98.50. ⚫ Common stock sells for $100. Do= $8.19 and g=4%. b=0.9; TRF 4%; RPM = 5%. Bond-Yield Risk Premium = 3%. If the weight of debt is 30%, weight of equity is 60% and weight of preferred stock is 10%. a. What is the WACC of X corporation. (Show your calculation for each component of WACC and the overall WACC) b. What should be the appropriate discount rate for the expansion program.

3) X Corporation wants to calculates its cost of capital for major expansion program which riskier than the risk level of its current operations ⚫ Tax rate=30%. • 30-year, 10% coupon, annual payment noncallable bonds sell for $1,200. New bonds will be privately placed with no flotation cost. ⚫ 10%, $100 par value, quarterly dividend, perpetual preferred stock sells for $98.50. ⚫ Common stock sells for $100. Do= $8.19 and g=4%. b=0.9; TRF 4%; RPM = 5%. Bond-Yield Risk Premium = 3%. If the weight of debt is 30%, weight of equity is 60% and weight of preferred stock is 10%. a. What is the WACC of X corporation. (Show your calculation for each component of WACC and the overall WACC) b. What should be the appropriate discount rate for the expansion program.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter26: Mergers And Corporate Control

Section: Chapter Questions

Problem 1P: Hasting Corporation is interested in acquiring Vandell Corporation. Vandell has 1 million shares...

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Hasting Corporation is interested in acquiring Vandell Corporation. Vandell has 1.5 million shares outstanding and a target capital structure consisting of 30% debt; its beta is 1.4 (given its target capital structure). Vandell has $10.19 million in debt that trades at par and pays an 8% interest rate. Vandell’s current free cash flow (FCF0) is $2 million per year and is expected to grow at a constant rate of 5% a year. Vandell pays a 25% combined federal-plus-state tax rate, the same rate paid by Hastings. The risk-free rate of interest is 5%, and the market risk premium is 6%. Hasting’s first step is to estimate the current intrinsic value of Vandell. What is Vandell’s cost of equity? What is its weighted average cost of capital? What is Vandell’s intrinsic value of operations? (Hint: Use the free cash flow corporate valuation model from Chapter 7.) Based on this analysis, what is the minimum stock price that Vandell’s shareholders should accept?
Q.An all-equity company is considering borrowing $10,000,000 and using the borrowed funds to repurchase shares. The company's cost of equity is 9%. EBIT is expected to be $3,600,000 every year forever. Assume all available earnings are immediately distributed to common shareholders and all the M&M assumptions are satisfied. If the company proceeds with the capital restructing, what will be the value of the company according to M&M Proposition I without taxes?
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