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(Answered) Treasury Management


Complete the Mini-Cases in detail according to the uploaded requirements. Document Preview: Provide detailed step by step solution explaining in words on how you get to the answers. The answers are provided to you and highlighted, however you have to explain step by step on how you get to the answers: 2.1. Potsdam Co has 3 million shares of common stock, each selling for $30, with? = 1.7. The company has $40 million in long-term bonds, selling at par, with coupon 7%. The tax rate of Potsdam is 30% and the risk-free rate is 5%. The expected return on the market is 12%. Find the WACC for Potsdam. 13.21%? Solution: ke = r +? [E(Rm)? r] r = 5%? = 1.7 E (Rm) = 12% So, ke = 5% + 1.7(12%-5%) Or, ke = 16.9% kd = YTM = cF + (F - B)/n (F + B)/2 c = 7% Assuming F = $1000 = B So, Kd = (7%*1000 + 0)/[(1000+1000)/2] Or, Kd = 7% t = 30% After tax cost of debt = kd (1-t) = 7% (1-30%) = 4.9% WACC = kd (1-t) B/V + ke S/V B= $ 40 million S = $30*3million = $90million V = B+S = $40million + $90million V= $130 million WACC = (4.9*40/130) + (16.9*90/130) Or, WACC = 13.21% 2.2. Ohio Corporation has 6 million shares of common stock priced at $25 per share, which has just paid its annual dividend of $1.75. The dividends have grown steadily at the rate of 5% per year and the investors expect the growth to continue in the future. The 6% coupon bonds of the corporation have a face value of $60 million. The bonds will mature in 10 years and currently they sell at $857.14 each. The tax rate of Ohio is 25%. Calculate its WACC. 10.73%? Solution: calculating cost of equity ke = (D1/P0) + g P0 = $25 g = 5% D0 = $1.75 D1 = D0(1+g) D1 = $1.75(1+5%) Or, D1 = $1.8375 Therefore, ke = 1.8375/25 + 5% Or, ke = 12.35% Calculating cost of debt: kd = YTM = cF + (F - B)/n (F + B)/2 c = 6% Let F = $1000 B = $857.14 n = 10 years kd = [6%*1000 + (1000-857.14)/10]/[(1000+857.14)/2] kd = 8% After tax kd = 8%(1-25%) Or, after tax cost of debt = 6% Calculating WACC: WACC = kd (1-t) B/V + ke S/V Number of bonds = $60 million/$1000 per... Attachments: Mini-Cases.docx Sample-Assign....docx Sample-Assign....docx Ch.-4.docx
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Treasury Management

 


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