Answer the following.

Hook Industries's capital structure consists solely of debt and common equity. It can issue debt at $\mathrm{r}_{\mathrm{d}}=11$ percent, and its common stock currently pays a 2.00 dollars dividend per share ($\mathrm{D}_0=2.00$ dollars). The stock's price is currently 24.75 dollars, its dividend is expected to grow at a constant rate of 7 percent per year, its tax rate is 35 percent, and its WACC is 13.95 percent. What percentage of the company's capital structure consists of debt?

Kahn Inc. has a target capital structure of 60 percent common equity and 40 percent debt to fund its 10 billion dollars in operating assets. Furthermore, Kahn Inc. has a WACC of 13 percent, a before-tax cost of debt of 10 percent, and a tax rate of 40 percent. The company's retained earnings are adequate to provide the common equity portion of its capital budget. Its expected dividend next year $\left(D_1\right)$ is 3 dollars, and the current stock price is 35 dollars.

a. What is the company's expected growth rate?

b. If the firm's net income is expected to be 1.1 billion dollars, what portion of its net income is the firm expected to pay out as dividends?

The Hester Division of Melbourne Sports Company manufactures boomerangs, which are sold to wholesalers and retailers. The division manager has set a target of 220,000 boomerangs for next month’s production and sales has developed an accurate budget for that level of sales. The manager has also prepared an analysis of the effects on operating income of deviations from the target:

The costs have the following characteristics: Variable manufacturing costs are $.85 per boomerang; variable selling costs are$.65 per boomerang; fixed manufacturing costs per month are $109,000; and fixed selling and administrative costs per month are$23,000.

1. Prepare a correct analysis of the changes in volume on operating income. Prepare a tabulated set of income statements at levels of 170,000, 220,000, and 260,000 boomerangs. Also show percentages of operating income in relation to sales.
2. Compare your tabulation with the manager’s tabulation. Why is the manager’s tabulation incorrect?

Olsen Outfitters Inc. believes that its optimal capital structure consists of 55 percent common equity and 45 percent debt, and its tax rate is 40 percent. Olsen must raise additional capital to fund its upcoming expansion. The firm will have 4 million dollars of retained earnings with a cost of $r_s=11$ percent. New common stock in an amount up to 8 million dollars would have a cost of $r_e=$ $12.5$ percent. Furthermore, Olsen can raise up to 4 million dollars of debt at an interest rate of $r_d=9$ percent and an additional 5 million dollars of debt at $\mathrm{r}_{\mathrm{d}}=13$ percent. The CFO estimates that a proposed expansion would require an investment of 8.2 million dollars. What is the WACC for the last dollar raised to complete the expansion?

Selecciona la respuesta más apropiada. (Select the most appropriate response.)

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Medtronic, Inc., is a medical technology company that competes for customers with St. Jude Medical S.C., Inc. James Hughes worked for Medtronic as a sales manager. His contract prohibited him from working for a competitor for one year after leaving Medtronic. Hughes sought a position as a sales director for St. Jude. St. Jude told Hughes that his contract with Medtronic was unenforceable and offered him a job. Hughes accepted. Medtronic filed a suit, alleging wrongful interference. Which type of interference was most likely the basis for this suit? Did it occur here? Explain.

Judy Baresford, the store manager of Comfort Futons, noticed that the amount of time the two bookkeepers were spending on accounts receivable, accounts payable, and cash receipts was increasing due to the store's increase in sales. A friend of Judy's who is also a store manager suggested that she might want to have some special journals designed that would reduce the amount of work involved in the day-to-day bookkeeping at her store. Judy approached Jon Fortner and Sue Stavio, the bookkeepers, and asked them to come up with a proposal for special journals. During lunch, Jon told Sue he thought designing special journals would be a lot of work and it was not in his job description. Sue told him not to worry because she would just copy pages of special journals from her accounting textbook and they could submit these journals as their own design. Jon liked the idea and they agreed to meet the next night, scan the journals into Word, and submit them to Judy the following morning.

If you were Judy, how would you respond to Sue and Jon's "plan"?

Answer the following question.

How should the capital structure weights used to calculate the WACC be determined?

Executive Chalk is financed solely by common stock and has outstanding 25 million shares with a market price of $10 a share. It now announces that it intends to issue$160 million of debt and to use the proceeds to buy back common stock.
c. What is the market value of the firm (equity plus debt) after the change in capital structure?

Although a limited liability company (LLC) may be the best organizational form for most businesses, a significant number of firms may be better off as a corporation or some other form of organization.

$1.$ The first group will outline several reasons why a firm might be better off as a corporation than as an LLC.

$2.$ The second group will discuss whether it is preferable for a five-member LLC to be member managed or manager managed and will identify some of the factors that should be taken into consideration.

Selecciona la respuesta más apropiada. (Select the most appropriate response.)

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Daniel is the owner of a chain of shoe stores. He hires Rubya to be the manager of a new store, which is to open in Grand Rapids, Michigan. Daniel, by written contract, agrees to pay Rubya a monthly salary and $20$ percent of the profits. Without Daniel's knowledge, Rubya represents himself to Classen as Daniel's partner, showing Classen the agreement to share profits. Classen extends credit to Rubya. Rubya defaults. Discuss whether Classen can hold Daniel liable as a partner.

Define each of the following terms:

a. Target capital structure; capital components

b. Before-tax cost of debt, $r_d ;$ after-tax cost of debt, $r_d(1-T)$

c. Cost of preferred stock, $r_p$

d. Cost of retained earnings, $r_s ;$ cost of new common stock, $r_e$

e. Weighted average cost of capital, WACC

f. Flotation cost, F; flotation cost adjustment; retained earnings breakpoint

Adamson Corporation is considering four average-risk projects with the following costs and rates of return:

$$\begin{array}{ccc} \text { Project } & \text { Cost } & \text { Expected Rate of Return } \\ \hline 1 & 2,000 \text{ dollars} & 16.00 \text{ percent} \\ 2 & 3,000 & 15.00 \\ 3 & 5,000 & 13.75 \\ 4 & 2,000 & 12.50 \end{array}$$

The company estimates that it can issue debt at a rate of $r_d=10$ percent, and its tax rate is 30 percent. It can issue preferred stock that pays a constant dividend of 5.00 dollars per year at 50.00 dollars per share. Also, its common stock currently sells for 38.00 dollars per share; the next expected dividend, $\mathrm{D}_{1^{\prime}}$, is 4.25 dollars, and the dividend is expected to grow at a constant rate of 5 percent per year. The target capital structure consists of 75 percent common stock, 15 percent debt, and 10 percent preferred stock.

a. What is the cost of each of the capital components?

b. What is Adamson's WACC?

c. Only projects with expected returns that exceed WACC will be accepted. Which projects should Adamson accept?