Assignment questions: Total grade – 10 points
- The market value of Majestic, Inc.’s debt claims is $500, and its equity claims are also $500. What is Majestic’s weighted average cost of capital if the after-tax cost of debt financing is 10 percent, and the cost of equity is 15 percent. (2 Marks)
- Critical thinking Question: Justify why the marginal income tax rate for the company does not need to be considered when calculating the after-tax cost of equity (common or preferred). (1.5 Marks)
- If you were a manager of a company, discuss the variables you would take into account when determining the dividend payments to your employees. (1.5 Marks)
- Asia-based Ashraf Inc., a high-tech company, raised $92 million in its initial public offering (IPO). Of the $35 offering price per share, the corporation got $29. $400,000 was spent on the firm’s legal fees, SEC registration fees, and other out-of-pocket expenses. The first trading day saw a 17% spike in the company’s stock price. How much did the company have to pay in total to issue the securities? (3 Marks)
- It is anticipated that Jack Security will continue to generate $300 in cash flow in the near future. Jack’s cost of equity capital is thirty percent, and the company is fully financed by equity. The management wants to borrow $100 at a 10 percent interest rate in order to buy back $100 worth of shares (assuming that the loan will be outstanding for an indefinite period of time). What is the firm’s current value today, using Modigliani and Miller’s Proposition 1; additionally, what is the value of the claims made on the firm’s assets after the stock repurchase? After the share repurchase, what rate of return will investors need to see on common stock? (2 Marks)
