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z Medical Questions

Your Question
Answer all questions and their sub-questions. Must Show your work! I need to see how you got your answer and must be able to use your notes to get the same answer.

8) (12 points) Windway Inc. has the following book value balance sheet in millions.
Cash 5 Accounts payable 10
Accounts receivable 10 Accruals 10
Inventory 15 Short-term debt 15
Net fixed assets 70 Long-term debt 25
Preferred stock 5
Common equity 35
Total assets 100 Total liabilities and equity 100
The following facts are given:
a) Short-term debt represents bank loans with a current rate of 7% with interest payable quarterly. The loans are used to finance inventory and receivables on a seasonal basis. Short-term debt is zero during the off-season.
b) The long-term debt consists of 20-year semiannual payment mortgage bonds with a coupon rate of 8%. The bonds have a par value of $1,000. Currently these bonds are selling for 104 percent of par value and have 14 years left to maturity.
c) The perpetual preferred stock has a $100 par value and pays a quarterly dividend of $2. The preferred stock is currently selling for $110 per share.
d) The company has 5 million shares of stock outstanding and the stock is currently trading at $23 per share. The stock currently pays a dividend of $1.00 per share. The company has not increased its dividend in the past three years but has actively engaged in share repurchases.
e) Currently the one year Treasury note has a yield of 0.349%. The 10 year Treasury bond is currently yielding 3.19%. The S&P 500 return for the last 12 months has been -7.6%, however historically the index has offered a premium over the risk-free rate of 7%.
f) Beta as reported by several sources ranges from 1.2 to 1.4 depending on the method of calculation. When you average the betas from these sources you come up with 1.32.
g) Windway Inc. is in the 40% federal plus state tax bracket.e
h) Return on equity based on average common equity was 15% last year.














Compute Windway’s cost of capital assuming no new equity will be issued and that the current capital structure is consistent with the firm’s target capital structure.

a) Find the component cost of debt
















b) Find the component cost of preferred stock


















c) Find the component cost of common equity
















d) Find the firm’s WACC














9) Oswald Supply Corporation recently issued 20-year bonds. The bonds have a coupon rate of 8 percent and pay interest semiannually. Also, the bonds are callable in 6 years at a call price equal to 115 percent of par value. The par value of the bonds is $1,000. If the yield to maturity is 7 percent, what is the yield to call?

10) (5 points) Augusta Golf Inc. is a new company that has gone public. As a new company they do not expect to issue any cash dividends for the first three years. However, the expectation is that beginning at t=4, they will be able to issue cash dividends. The firm further plans, at that time, to payout 40% of its earnings which are expected to be $30,000,000. They have 10,000,000 share outstanding. Once they reach that point where they can pay dividends, they feel they will be well established and can expect a constant future growth rate of 5%. Given all their information, analysts feel that a required rate of return for this stock should be 12.5%. At what price should the stock sell today based on this information.


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