8. You have the following information about Burgundy Basins, a sink manufacturer. Equity shares outstanding Stock price per share Yield to maturity on debt Book value of interest-bearing debt Coupon interest rate on debt Market value of debt 20 million $40.00 7.5% $320 million 4.8% $290 million $500 million Book value of equity Cost of equity capital Tax rate 14% 35% Burgundy is contemplating what for the company is an average-risk investment costing $40 million and promising an annual ATCF of $6.4 million in perpetuity. a. What is the internal rate of return on the investment? b. What is Burgundy's weighted-average cost of capital? c. If undertaken, would you expect this investment to benefit share- holders? Why or why not?

8. You have the following information about Burgundy Basins, a sink manufacturer. Equity shares outstanding Stock price per share Yield to maturity on debt Book value of interest-bearing debt Coupon interest rate on debt Market value of debt 20 million $40.00 7.5% $320 million 4.8% $290 million $500 million Book value of equity Cost of equity capital Tax rate 14% 35% Burgundy is contemplating what for the company is an average-risk investment costing $40 million and promising an annual ATCF of $6.4 million in perpetuity. a. What is the internal rate of return on the investment? b. What is Burgundy's weighted-average cost of capital? c. If undertaken, would you expect this investment to benefit share- holders? Why or why not?

Fundamentals of Financial Management, Concise Edition (MindTap Course List)

9th Edition

ISBN:9781305635937

Author:Eugene F. Brigham, Joel F. Houston

Publisher:Eugene F. Brigham, Joel F. Houston

Chapter10: The Cost Of Capital

Section: Chapter Questions

Problem 1DQ: As a first step, we need to estimate what percentage of MMMs capital comes from debt, preferred...

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As a first step, we need to estimate what percentage of MMMs capital comes from debt, preferred stock, and common equity. This information can be found on the firms latest annual balance sheet. (As of year end 2014, MMM had no preferred stock.) Total debt includes all interest-bearing debt and is the sum of short-term debt and long-term debt. a. Recall that the weights used in the WACC are based on the companys target capital structure. If we assume that the company wants to maintain the same mix of capital that it currently has on its balance sheet, what weights should you use to estimate the WACC for MMM? b. Find MMMs market capitalization, which is the market value of its common equity. Using the sum of its short-term debt and long-term debt from the balance sheet (we assume that the market value of its debt equals its book value) and its market capitalization, recalculate the firms debt and common equity weights to be used in the WACC equation. These weights are approximations of market-value weights. Be sure not to include accruals in the debt calculation.
The Sweet Melon Corp. has total 100 shares trading on the market at $20 each.The book value of the total equity is $3500.The total market value of debt issurance is $4000.The expected return on total assets is 15% and the expected return on debt is 10%.What is the estimated return on equity? A.17.5% B.25% C.None of the choices D.18.3
You have the following balance sheet and information about FedEx: Balance Sheet: Assets Liabilities & Shareholders’ Equity Current Assets $31,000,000 Current Liabilities $28,000,000 PP&E $197,000,000 Long-term Debt (Corporate Bonds) $105,000,000 Equity $95,000,000 Total $228,000,000 Total $228,000,000 FedEx has 16 million shares outstanding. FedEx’s shares have a beta of 1.6 and are currently trading for $15 per share. The expected market risk premium is 7%. The risk-free rate is 1%. The debt is trading at 101% of book value. The coupon rate on existing debt is 5% The yield to maturity on existing debt is 3%. The corporate tax rate is 21%. Compute FedEx’s weighted-average cost of capital (WACC).
Railsplitters, Inc. has the following information for its capital structure: Instrument: Amount Issued Current Price YTM Bond A $500 Million 100.82 4.36% Bond B $350 Million 101.36 4.49% Common Stock 42.5 Million Shares $28.21 per share E(R ) Market = 8.65% β = 1.27 Expected Dividend = $1.95 Rf = 2.10% Growth Rate = 2.75% Given this information, if the tax rate of the firm is 30%, what is the after-tax cost of debt?
Assume JUP has debt with a book value of $24 million, trading at 120% of par value. The firm has book equity of $28 million, and 2 million shares trading at $20 per share. What weights should JUP use in calculating its WACC? A) 41.86% for debt, 58.14% for equity B) 37.67% for debt, 62.33% for equity C) 33.49% for debt, 66.51% for equity D) 29.30% for debt, 70.70% for equity
Hook Industries’s capital structure consistssolely of debt and common equity. It can issue debt at rd 5 11%, and its commonstock currently pays a $2.00 dividend per share (D0 5 $2.00). The stock’s price is currently$24.75, its dividend is expected to grow at a constant rate of 7% per year, its tax rate is35%, and its WACC is 13.95%. What percentage of the company’s capital structure consistsof debt?
. The following are some financial data pertaining to Czy Corporation: Capital Structure (In Millions) Long-term debt (12% interest rate) P140 Stockholder’s Equity: Common stocks, P10 par value P40 Additional paid-in-capital 400 Retained Earnings 420 860 Total P1000 Czy Corporation’s common stock is currently selling at par. The current market return is 14% and the risk-free is 10%. The beta value for Czy Corporation is 1.20. It pays income tax at the rate of 30% of taxable income. Question: The after-tax cost of debt of Czy Corporation is? Group of answer choices 17.64% 3.84% 8.40% 14% 12%
The following are some financial data pertaining to Czy Corporation: Capital Structure (In Millions) Long-term debt (12% interest rate) P140 Stockholder’s Equity: Common stocks, P10 par value P40 Additional paid-in-capital 400 Retained Earnings 420 860 Total P1000 Czy Corporation’s common stock is currently selling at par. The current market return is 14% and the risk-free is 10%. The beta value for Czy Corporation is 1.20. It pays income tax at the rate of 30% of taxable income. Question: The weighted average cost of capital is ? Group of answer choices 14.80% 11.48% 13.91% 22.96%
Hook Industries's capital structure consists solely of debt and common equity. It can issue debt at rd = 11%, and its common stock currently pays a $2.75 dividend per share (D0 = $2.75). The stock's price is currently $33.00, its dividend is expected to grow at a constant rate of 9% per year, its tax rate is 40%, and its WACC is 13.55%. What percentage of the company's capital structure consists of debt?