Cоst оf Bаnk Lоаns ( 20 points) Big Dаddy Liquor Stores has been negotiating a bank loan to expand its drive through service in an effort to encourage the use of alcohol to combat the effects of Measles without requiring customers the inconvenience of requiring customers to wear masks on premises (or risk others seeing what they are buying). Note that Big Daddy does not have any additional funds, so he would have to borrow to meet any lender requirements such as compensating balance or other requirements. Calculate the Effective Rate of each of these loan options and make a recommendation. (In all 4 cases, MAKE SURE THAT YOU BORROW ENOUGH TO COVER THE Compensating Balance &/or Discount). 12.5% on a simple interest loan with no compensating balance requirement and interest due at the end of the loan. Amount Borrowed_______________ Effective Rate________________ 9% annual rate on a simple interest loan (end of the year payment) With a compensating balance requirement of 20% Amount Borrowed_______________ Effective Rate________________ 8.125% annual rate on a discounted loan, end of the year payment Amount Borrowed_______________ Effective Rate________________ 7% on an Add on Interest loan (with monthly payments) Amount Borrowed_______________ Effective Rate________________ What option would you recommend to Big Daddy? (and why)
Pumpkin Spice hаs 4 milliоn shаres оf cоmmon stock outstаnding, 1,250,000 shares of 12%, $100 par value preferred stock outstanding and 220,000 10% semiannual bonds outstanding, par value $1000 each. In addition, the company uses an aggressive financing policy which uses a $5,000,000 line of credit as part of its capital structure (the interest rate on this debt is 8% before tax). The stock currently sells for $72 paid a dividend of $5 last year and the dividend is growing at 4.25% per year. (The market is expected to return 10%, and the risk free rate is roughly 4%.) The stock has a B=1.2, the preferred stock sells for $86 and the bonds mature in 20 years and sell for $965. The floatation costs for common stock, preferred stock, and bonds are $2, $6, and $15 respectively. The tax rate is 21%. 1. What are the Market Values of St. Debt, LT Debt, preferred stock and common stock? (4 points) 2. What are the Market Value WEIGHTS of of St. Debt, LT Debt, preferred stock and common stock? (4 points) 3. What is the AFTER TAX COST of Issuing New: Short term debt Long Term Debt Preferred Stock Common Stock (you must label the 4 values) (4 points total) 4. What is the WACC?(2 points) 5 If the firm was offered an investment of average risk and a promised return (IRR) of 9.75%, EXPLAIN WHY the company would or would not accept this project. (4 points)