1. ABC Inc.'s capital structure is 40% debt, 15% preferred, and 45% common equity, and its tax rate is 35%. For financing, (a) ABC sold a non-callable bond several years ago that now has 15 years to maturity with 8% annual coupon, paid semiannually, at a price of $1,065, and a par value of $1,000. (b) ABC sold a perpetual preferred stock for $95.50 per share, with a $7.50 annual dividend and a flotation cost of 3.00% of the price. (c) ABC also has beta = 1.2, risk free rate of return rRF = 6.00%; market risk premium RPM = 7.00%; The question is: What is the company's WACC?
1.
ABC Inc.'s capital structure is 40% debt, 15% preferred, and 45% common equity, and its tax rate is 35%. For financing, (a) ABC sold a non-callable bond several years ago that now has 15 years to maturity with 8% annual coupon, paid semiannually, at a price of $1,065, and a par value of $1,000. (b) ABC sold a perpetual
The question is: What is the company's WACC?
2.
ABC is considering a project that has the following cash flow and WACC data.
(a)What is the project's aNPV?
(b)What is the project's
(c)What is the project’s MIRR?
(d)Should the project be accepted? Why?
WACC: The result of (1) above
Year 0 1 2 3 4 5
Cash flows -$1,100 $420 $390 $370 $350 $330
3.
ABC is now considering changing the debt ratio and moving it to the new debt/assets ratio as indicated below, and replacing all preferred stocks with debt. The money raised would be used to repurchase preferred stock at the current price. It is estimated that the increase in risk resulting from the additional leverage would cause the required rate of
(a)By how much would the WACC change, i.e., what is WACCOld - WACCNew (WACC (in question (1) or (2)) – WACC (in question (3))?
New Debt/Assets 60% Interest rate new = rd 6.0%
New Equity/Assets 40% New
(b)Based on the Hamada equation, what would the firm's beta be if it used no debt, i.e., what is its unlevered beta?
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