products, among others. At the close of 2018, the firm's balance sheet appeared as9-15. (Weighted average cost of capital) Ambeon Holdings PLC is a publicly heldcompany. The firm began as a textile company but to become a leading diversi-fied conglomerate with a presence in industries such as textiles, porcelain, leathergrewfollows:Cash$ 530,000Accounts receivable4,563,000Inventories7,500,000Long-term debtNet property, plant, and equipment$13,090,00018,982,000Common equityTotal assets18.485.000$31,575,000Total debt and equity$31,575,000 a 14 percent return on its common stock, and the firm's bonds command a yield tomaturity of 7 percent. The fin faces a tax rate of 16 percent.At present, the firm's common stock is selling for a price equal to its book value, andits bonds are selling at par. Ambeon's managers estimate that the market requiresCHAPTER 9 • The Coosent, the firm's common stock is selling for a price equal to its book value, andAhonds are selling at par. Ambeon's managers estimate that the market requiresM percent return on its common stock, and the firm's bonds command a yield tomaturity of 7 percent. The firn faces a tax rate of 16 percent., What is Ambeon's weighted average cost of capital?h If Ambeon's stock price were to rise such that it sold at 1.7 times book value,causing the cost of equity to fall to 12 percent, what would the firm's cost ofcapital be (assuming the cost of debt and tax rate do not change)?c. Ambeon is considering a new business opportunity involving the acquisitionof a trucking firm. What do you think the firm should do to select an appro-priate cost of capital for evaluating this acquisition? (Note: This is a thoughtexercise. No calculations required.)a

Weighted average cost of capital capital can be defined as average rate of return from all the…

a. What is Ambeon's weighted average cost of capital? b. If Ambeon's stock price were to rise such that it sold at 1.7 times book value, causing the cost of equity to fall to 12 percent, what would the firm's cost of capital be (assuming the cost of debt and tax rate do not change)? c. Ambeon is considering a new business opportunity involving the acquisition of a trucking firm. What do you think the firm should do to select an appro- priate cost of capital for evaluating this acquisition? (Note: This is a thought exercise. No calculations required.)

a. What is Ambeon's weighted average cost of capital? b. If Ambeon's stock price were to rise such that it sold at 1.7 times book value, causing the cost of equity to fall to 12 percent, what would the firm's cost of capital be (assuming the cost of debt and tax rate do not change)? c. Ambeon is considering a new business opportunity involving the acquisition of a trucking firm. What do you think the firm should do to select an appro- priate cost of capital for evaluating this acquisition? (Note: This is a thought exercise. No calculations required.)

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter17: Multinational Capital Structure And Cost Of Capital

Section: Chapter Questions

Problem 14QA

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