Part 1
Q#1. Savers has an issue of preferred stock with a $3.85 stated dividend that just sold for $87 per share. What is the bank’s cost of preferred stock?
Q#2. Branson Manufacturing has a target debt-equity ratio of .35. Its cost of equity is 11 percent, and its pretax cost of debt is 6 percent. If the tax rate is 21 percent, what is the company’s WACC?
Q#3. Fama’s Llamas has a WACC of 8.4 percent. The company’s cost of equity is 11 percent, and its pretax cost of debt is 5.8 percent. The tax rate is 25 percent. What is the company’s target debt-equity ratio?
Q#4. Why is the use of debt financing referred to as using financial “leverage”?
Q#5. Explain what is meant by business and financial risk. Suppose Firm A has greater business risk than Firm B. Is it true that Firm A also has a higher cost of equity capital? Explain
Assignment Requirement:
- Please answer all questions and make sure to include the calculations; include at least 2 reputable sources.
- Please provide a title page including your Name, Course Number, Date of Submission, and Assignment name.
- Paraphrasing of content – Demonstrate that you understand the case by summarizing the case in your own words. Direct quotes should be used minimally.
Part 2
1. Discuss how each of the following acts of production involve transformation of structure, location, and/or time. (20 points)
A) Production of an automobile
B) A “ U-store it self-service storage center( assume you are the manager).
2. Electrical utility companies usually operate their most modern efficient equipment around the clock and use their older and less efficient equipment only to meet periods of peak demand for electricity. ( 20 points). A) What does this imply for the short-run marginal cost of these firms? B) Why do these firms not replace all of their older equipment with newer equipment in the long-run?
