Hi Shwan,
I am also appearing for Part 2, using gleim but still studying. I have a doubt regarding chapter 3 of Gleim Valuations and CoC. The essay question:
Question:
Langley Industries plans to acquire new assets costing $80 million during the coming year and is in the process of determining how to finance the acquisitions. The business plan for the coming year indicates that retained earnings of $15 million will be available for new investments. As far as external financing is concerned, discussions with investment bankers indicate that market conditions for Langley securities should be as follows:
Bonds with a coupon rate of 10% can be sold at par.
Preferred stock with an annual dividend of 12% can be sold at par.
Common stock can be sold to yield Langley $58 per share.
The company's current capital structure, which is considered optimal, is as follows:
Long-term debt $175 million
Preferred stock 50 million
Common equity 275 million
Financial studies performed for Langley indicate that the cost of common equity is 16%. The company has a 40% marginal tax rate. (Ignore floatation costs for all calculations.)
My solution had calculated the residual capital required after deducting the 15Mn of retaining earnings available.
Bonds with a coupon rate of 10% : 175 Mn/ 500Mn = 35%x65 Mn = 22.75Mn
Preferred stock with an annual dividend of 12% : 50Mn/500Mn =10%x65Mn = 6.5Mn
Common stock 16% : 275Mn/500Mn = 55%x65Mn = 35.75Mn
But below is the gleim solution:
New debt $28 million
New preferred stock 8 million
Retained earnings 15 million
New common stock 29 million
Total $80 million
15+29 =44 Mn =44/80 = 55%
Whereas the approach I had taken is being used in the below qn and solution:
A company's current capital structure is optimal, and the company wishes to maintain it.
Debt 25%
Preferred equity 5
Common equity 70
Management is planning to build a $75 million facility that will be financed according to this desired capital structure. Currently, $15 million of cash is available for capital expansion. The percentage of the $75 million that will come from a new issue of common stock is
A.
56.00%
Answer (A) is correct.
Because $15 million is already available, the company must finance $60 million ($75 million – $15 million). Of this amount, 70%, or $42 million, should come from the issuance of common stock to maintain the current capital structure. The $42 million represents 56% of the total $75 million.
Please help understand the difference, if you can.
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Shobana Jayaraman
Analyst
MISSISSAUGA ON
Canada
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Original Message:
Sent: 02-06-2019 08:04 AM
From: Shawn Osborne
Subject: Study Groups in Feb
If its Part 2, please let me know I would be willing to come down from Chico, CA. I am using Gleim, sitting for Part 2 on Feb 28th, have read the book, taken all McQ's, and tested on over 500+ questions thus far.
Original Message------
What part are you studying? I am studying part II and I am in the Bay Area. I take the test Feb 28th.
Monica
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Monica Devoe
Supervisor
Oakland CA
United States
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