Jenkins expects to raise future capital in the proportions currently indicated o

Question

Jenkins expects to raise future capital in the proportions currently indicated on the balance sheet. The current market price for Jenkins debentures is $1,075. If new debentures were sold, the issuance cost would be $20 per bond. The current market price for the preferred stock is $19. Issuance costs on new equity would be $2.50 per share. The current market price for Jenkins common stock is $40. The stock pays a current (D0) dividend of $3. This dividend is expected to grow at an annual rate of 7 percent. What is the weighted capital for Jenkins Resources, assuming new sale of new shares, new debt comes from the sale of debentures, and new preferred comes from the sale of preferred stock? The firm

Explanation / Answer

Net Annual cash flow with out acquiring of new potenitial investment
annual revenue -          1200000 less: operating expense 700000 less: deprciation             200000 Profit before tax            300000 tax 40%                        120000 net cash flow               $180000 with acquisiton of new machine (mixed) annual revenue -           1600000 less: operating expense -900000 less: deprciation            3200000 Profit before tax           380000     tax 40%                       152000 net annual cash flow     $228000 only new investment's net annual cash flow annual revenue -           1200000-1600000) =400000 less: operating expense (700000-900000)    = 200000 less: deprciation            (200000-3200000)   = 120000 Profit before tax           380000                  = $80000 tax 40%                       152000                   = $32000 net annual cash flow     $228000                 = $48000 the projects net cash nnual flows for 10 years = $48000*10 years = $480000 net investment for this project =[initial cash out lay - gross annual cash flows fro 10 years] [1200000-480000] = $720000 annual revenue -           1200000-1600000) =400000 less: operating expense (700000-900000)    = 200000 less: deprciation            (200000-3200000)   = 120000 Profit before tax           380000                  = $80000 tax 40%                       152000                   = $32000 net annual cash flow     $228000                 = $48000 the projects net cash nnual flows for 10 years = $48000*10 years = $480000 net investment for this project =[initial cash out lay - gross annual cash flows fro 10 years] [1200000-480000] = $720000

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