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Security Type Market Value Before-tax Required Return Preferred shares $200 7.0% Bonds $500 7.5% Common stock $700 13.0% Bond interest payments: $40...


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Security Type

   Market Value

Before-tax Required Return

Preferred shares

$200

7.0%

Bonds  

$500

7.5%

Common stock 

$700

13.0%

  • Bond interest payments: $40
  • Preferred share dividends: $14
  • Net income available to common: $115
  • Investment in working capital: $30
  • Investment in fixed capital: $100
  • Net new borrowing: $30
  • Depreciation: $50
  • Tax rate: 20%

(a) Compute the firm’s weighted average cost of capital. (10 marks)

(b) Compute the current FCFE for SP Shipping. (5 marks)

(c) Compute the current FCFF for SP Shipping. (5 marks)

(d) Discuss why the value of SP Shipping’s equity obtained by the single stage FCFE and single stage FCFF may be different. (5 marks)

 


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DATE ANSWERED

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