The Corporation, a Firm in the 31 percent Marginal Tax Bracket

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Marginal Tax Bracket

The Corporation, a firm in the 31 percent marginal tax bracket with a required rate of return or discount rate of 12 percent, is considering a new project. This project involves the introduction of a new product. This project is expected to last 5 years and then, because this is somewhat of a fad product, it will be terminated. Given the following information, determine the net cash flows associated with the project, the project’s net present value, the profitability index, and the internal rate of return. Apply the appropriate decision criteria.

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GB Timbers, Based in Germany, Supplies

GB Timbers, Based in Germany, Supplies for $5 (Instant Download)

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GB Timbers, based in Germany, supplies timber products to construction and manufacturing industries. The company reported after-tax earnings available to common stocks of RM3,200,000. From these eamings, the management decided to pay a dividend of RM0.80 on each of its 4,000,000 common shares outstanding. The capital structurë of the company includes 30% debt, 40% common stock, end 30% preferred stock. The tax rate applicable to GB Timbers is 30%.

i) If the market price of the common stock is RM3.60,) and dividend is expected to grow at a rate of 8% per year for the foreseeable future, Ahat is the required rate of return on the company’s common stock? (2 marks)

ii) The company can issue a RM1.00 dividend preferred stock for a market price of RM10.00 per share. The floatation costs would amount to RMO.60 per share. What is the cost of preferred stock financing? (2 marks)

iii) In addition, the company can issue RM100 per value, 8% coupon, 10 year bonds that can be sold for RM110 each. Floatation costs would amount to RM2 per bond. Use the estimation formula to figure the approximate cost of debt financing. (2 marks)

iv) What is the Weighted Average Cost of Capital (WACC)? (2 marks)

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