Finance homework help the problem with the residual dividend policy ratio is___?

Question

Finance homework help

the problem with the residual dividend policy ratio is___?

the weights used to determine the relative importance of the firm's sources of captal should reflect___?

which of the following must be adjusted for the firm's tax rate when estimating the weighted average cost of captal WACC? A. cost of common equity, B. Cost of debt, C. Cost off preferred stock, D. all the above

7-10 use the chart below
Accounts payable & Accruals: $300m (book value)
Short-term notes: $150million (book value), 150m (market value)
Long-term debt: 450million (book value), 600million (market)
Preferred stock: 75million (book value), 150million (market)
common stock: 600million (book), 1500million (market)
Total: 1575million (book), 2400million (market)

7. Percentage of common stock in spencer's weighted average cost of capital is__?
8. Percentage of debt in spencer's weighted average cost of capital is___?
9. Sonderson Corporation is undertaking a capital budgeting analysis. The firm's beta is 1.5. The rate on six-month T-bills is 5% and the return on the S&P500 index is 12%. What is the appropriate cost of common equity in determing the firm's cost of capital?
10. Bender and Co. is issuing a $1,000 par value bond that pays 9% interest annually. Investors are expected too pay $918 for the 10-year bond. What is the after-tax cost of debt if the firm is in the 34% tax bracket?__?

Explanation / Answer

he problem with the residual dividend policy ratio is that it can lead to erratic dividend payouts that may prevent the
firm from establishing a reliable clientele of investors who prefer a particular dividend policy.

the weights used to determine the relative importance of the firm's sources of captal should reflect market value of each equity, debt and preferred stock

which of the following must be adjusted for the firm's tax rate when estimating the weighted average cost of captal WACC? B. Cost of debt,

7-10 use the chart below
Accounts payable & Accruals: $300m (book value)
Short-term notes: $150million (book value), 150m (market value)
Long-term debt: 450million (book value), 600million (market)
Preferred stock: 75million (book value), 150million (market)
common stock: 600million (book), 1500million (market)
Total: 1575million (book), 2400million (market)

7. Percentage of common stock in spencer's weighted average cost of capital is = 1500/(2400)=62.50%

8. Percentage of debt in spencer's weighted average cost of capital is___?

= (300+150+600)/24000= 43.75%

9. Sonderson Corporation is undertaking a capital budgeting analysis. The firm's beta is 1.5. The rate on six-month T-bills is 5% and the return on the S&P500 index is 12%. What is the appropriate cost of common equity in determing the firm's cost of capital?

cost of common equity = 5% + 1.5*(12%-5%)= 15.50%

10. Bender and Co. is issuing a $1,000 par value bond that pays 9% interest annually. Investors are expected too pay $918 for the 10-year bond. What is the after-tax cost of debt if the firm is in the 34% tax bracket?__?

Let before tax cost of debt = r

918 = 90*(1-1/(1+r)^10)/r + 1000/(1+r)^10

R= 10.35%

after-tax cost of debt = (1-34%)*10.35%= 6.83%

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