Question

Lingenburger Cheese Corporation has 6.3 million shares of common stock outstanding, 220,000 shares of 3.6 percent preferred stock outstanding, par value of $100; and 105,000 bonds with a semiannual coupon rate of 5.3 percent outstanding, par value $1,000 each. The common stock currently sells for $73 per share and has a beta of 1.15, the preferred stock has a par value of $100 and currently sells for $83 per share, and the bonds have 17 years to maturity and sell for 107 percent of par. The market risk premium is 7.1 percent, T-bills are yielding 3.1 percent, and the company’s tax rate is 23 percent. What is the firm’s market value capital structure? Note: Do not round intermediate calculations and round your answers to 4 decimal places, e.g., .1616.If the company is evaluating a new investment project that has the same risk as the firm’s typical project, what rate should the firm use to discount the project’s cash flows? Note: Do not round intermediate calculations enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.

Answer 1

The market value capital structure of Lingenburger Cheese Corporation is $590.51 million. The firm should use a discount rate of 11.165% to evaluate the new investment project.

Step-by-step explanation:

To determine the market value capital structure of Lingenburger Cheese Corporation, we need to calculate the market value of each component of the capital structure (common stock, preferred stock, and bonds) and then sum them up.

Market value of common stock = Number of shares of common stock outstanding x Price per share = 6.3 million x $73 = $459.9 million

Market value of preferred stock = Number of shares of preferred stock outstanding x Price per share = 220,000 x $83 = $18.26 million

Market value of bonds = Number of bonds outstanding x Market price per bond = 105,000 x $1,070 = $112.35 million

The total market value capital structure is the sum of the market values of the three components: $459.9 million + $18.26 million + $112.35 million = $590.51 million

Therefore, the firm's market value capital structure is $590.51 million.

To discount the cash flows of the new investment project, the firm should use the required rate of return that is appropriate for projects with similar risk. In this case, the firm's typical project has a beta of 1.15. Using the CAPM (Capital Asset Pricing Model), we can calculate the required rate of return as follows:

Required rate of return = Risk-free rate + Beta x Market risk premium = 3.1% + 1.15 x 7.1% = 11.165%

Therefore, the firm should use a discount rate of 11.165% to evaluate the new investment project.

Answer 2

Answer: You would have to divide multiply and subtract half of those numbers, so go through the Question you asked and do the math.

Step-by-step explanation: