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Financial Management
Unit VIII Assignment
This assignment will allow you to demonstrate the following objectives:
Compute the net present value, profitability index, and internal rate of return for a given
company.
Predict the best choice for a company based on analysis of financial data.
Compute a company’s WACC using given percentages.
Calculate the cost of capital of a stock.
Computer the after-tax cost of capital for bonds.
Instructions: Answer the questions directly on this document. When you are finished, select
“Save As,” and save the document using this format: Student ID_UnitVIII. Upload this document
to BlackBoard as a .doc, docx, or .rtf file. Show all of your work.
1. The capital structure for Mills Corporation is shown below. Currently, flotation costs are 13% of
market value for a new bond issue and $3 per share for preferred stock. The dividends for
common stock were $2.50 last year and have an estimated annual growth rate of 6%. Market
prices are $1,050 for bonds, $20 for preferred stock, and $40 for common stock. Assume a 34%
tax rate.
Financing Type
% of Future Financing
Bonds (8%, $1k par, 16 year maturity)
36%
Common equity
45%
Preferred stock (5k shares outstanding, $50 par, $1.50 dividend)
19%
Total %
100%
Compute the company’s WACC.
Where,
I = Interest Amount
n = No of years to maturity
F= Future Redemption V
t = Tax Rate
Kd = Cost of Deb
P = Net Issue Proceeds
Cost of debt = [{I (1-t) + (F-P) /n} / {(F+ P) /2}]*100
therefore
Kd [{80(1-0.34) + (1000-879.75)/16}/ {(1000+879.75)/2}] * 100
Kd = 6.42%

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Financial Management
Unit VIII Assignment
Where,
D= Dividend Rate 3%
i.e. 1.50/ 50 * 100
Paid up value 50.00
Net Issue Proceeds 16.99
Cost of Preferred stock:
Kp = [ D*(Paid up value/Net Issue Proceeds)]*100
Kp = 0.3* ($50 / 16.99) *100
Kp = 8.83%
Cost of Equity
D = Expected Dividend 2.65
2.50*1.06 or 2.50*0.06+2.50 = 2.65
P= Current Year Price 35.00
F = Flotation Costs 136.5
g = growth rate 6%
Ke = [{D¹/ (P-f)} + g]*100
Ke = [{2.65 + 136.5)] +0.06 ] *100
Ke 13.57%
We know that the weighted average cost of capital is equal to the average cost of capital required to be in
the business.
Therefore, WACC= [∑Cost*Weights]/∑Weights
Source
Cost
Weights
Cost*Weights
Debt
6.42%
0.36
0.023112
Preferred stock
8.83%
0.45
0.039735
Equity
13.57%
0.19
0.025783
1
0.1525
WACC = 15.25%

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Financial Management Unit VIII Assignment This assignment will allow you to demonstrate the following objectives: • Compute the net present value, profitability index, and internal rate of return for a given company. Predict the best choice for a company based on analysis of financial data. Compute a company’s WACC using given percentages. Calculate the cost of capital of a stock. Computer the after-tax cost of capital for bonds. • • • • Instructions: Answer the questions directly on this document. When you are finished, select “Save As,” and save the document using this format: Student ID_UnitVIII. Upload this document to BlackBoard as a .doc, docx, or .rtf file. Show all of your work. 1. The capital structure for Mills Corporation is shown below. Currently, flotation costs are 13% of market value for a new bond issue and $3 per share for preferred stock. The dividends for common stock were $2.50 last year and have an estimated annual growth rate of 6%. Market prices are $1,050 for bonds, $20 for preferred stock, and $40 for common stock. Assume a 34% tax rate. Financing Type Bonds (8%, $1k par, 16 year maturity) Common equity Preferred stock (5k shares outstanding, $50 par, $1.50 dividend) Total % Compute the company’s WACC. Where, I = Interest Amount n = No of years to maturity F= Future Redemption V t = Tax Rate Kd = Cost of Deb P = Net Issue Proceeds Cost of debt = [{I (1-t) + (F-P) /n} / {(F+ P) /2}]*100 therefore Kd [{80(1-0.34) + (1000-879.75)/1 ...
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