Question

25%

currens and tarpet capital structure, is 40 percent debt and 60 percent eguity. Nest year's net income is peojected to be $21,000, and Byrn's payout ratio Chapter 11 and D. Byrom Corporatioe's i. 30 peint. The company's earsings and are growing at a conutant rate of S percent, the last dividend (D) was $2.00, and Byron ean raise all the debt fnancing it needs at 8 pereent the currene stock price is $20.00. a What is the after axx cost of debc? (1 poin) Portfolior What is the cost of retained earnings (ie, return on the stock)? (2 points) b. Portfolio c. What is your weighted average cost of capital assuming your answer to Dia) is 7 percent and Dyb) is 12%7 (2 points) remium Regi Continuing the Payday loan experience: Upon closer study you noticed that CASH Texas also offers a 60-day loan which has a 24% annual interest rate. Like other CASH Texas Loans, there is a $60 Customer Service Organization (CSO) fee to set up and manage the loan. You are going in to borrow $1000. What will be your annualized percentage rate (APR) and effective annual rate (EAR) on each? Interest rate per period (0.5 points): Total Cost (0.5 points): Period Rate (0.5 points): APR (0.5 points): EAR (1.0 point): Chapter 11: D. B yron Corporation's current and target capital structure, is 40 percent debt and 60 percent e on equity. Next year's net income is projected to be $21,000, and Byron's payout ratio is 30 percent and ron can raise all the debt financing it needs at 8 percent. The company's earningsa s are growing at a constant rate of 5 percent; the last dividend Do ws $2.00 the current stock price is S20.00· "(eleide t dy ( 0 e: a 5oro a. What is the after-tax cost of debc? (1 point) b. What is the cost of retained earnings (i.e, return on the stock)? (2 points) o D(a) is 7 percent c. What is your and D(b) is 12%) (2 points) hted average cost of capital assuming your Allage cost of Cafia 00 Continuing the Payday loan experience: Upon closer study you noticed that CASH Texas also offers a 60-day loan which has a 24% annual interest rate. Like other CASH Texas Loans, there is a $60 Customer Service Organization (CSO) fee to set up and manage the loan. You are going in to borrow $1000. What will be your annualized percentage rate (APR) and effective annual rate (EAR) on each? Interest rate per period (0.5 points): Total Cost (0.5 points): Period Rate (0.5 points) APR (0.5 points) EAR (1.0 point)

Answer 1

a)	after tax cost of debt			8%*(1-.25)		6.00%
b)	Cost of retained earnings			2*(1+5%)/20 + 5%		15.500%
c)	Capital source	Proportion	Cost
	Equity	60%	12%
	Debt	40%	7%
	WACC	10.0%

Loan	1000
CSO fee	60
Net borrowing	940
Annual interest rate	24%
Term of loan	60	days
Interest rate per period	24%/360	(Assuming 360 days in a year)
Interest rate per period	0.000667
Periodic payment	17.01	PMT(0.000667,60,1000,,)
Total paid back	1020.467	17.01*60
Total Cost	51.36%	((1020.467-940)/940)*360/60
Period rate	0.001427
APR	51.36%
EAR	(1+51.36%/360)^360-1
EAR	67.07%