An all-equity company decides to recapitalize. The company has an unlevered beta of 1.1, the market risk premium is 6% and the risk-free rate is 5%. The company's tax rate is 25%. If the company starts to borrow with a 25% debt ratio, what will be the levered beta using Hamada’s equation? What is the cost of equity before and after the recapitalization respectively? Why is the cost of equity higher after the recapitalization?
Q: Oakmont Company has an opportunity to manufacture and sell a new product for a four-year period. The…
A: NPV is also known as Net present value. It is a capital budgeting techniques which help in decision…
Q: The current price of Natasha Corporation stock is $6.39. In each of the next two years, this stock…
A: An option is a type of financial instrument that is based on the value of underlying securities,…
Q: Assume that you calculated the ATER after year 3 as $275,000, the after-tax cash flow in year 4 was…
A: The incremental IRR refers to the measure of the profitability of an increase in investment in an…
Q: The price of a stock is $64. A trader buys 1 put option contract (each contract is for 100 options)…
A: Put option gives the holder of option , right and not obligation to sell underlying asset at a…
Q: A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a…
A: The Sharpe ratio calculates risk-adjusted performance by dividing the additional earnings on a…
Q: Smashed Pumpkins Company paid $136 in dividends and $568 in interest over the past year. The company…
A: Dividends = $136 Interest = $568 Retained Earnings = $474 Account Payable = $594 Sales = $16265…
Q: ectricity from the local utility is considering installing a steam generator. A large generator…
A: Net present is the one of the most important capital budgeting method used and is based on the time…
Q: a. Net margin. (Round your answers to 2 decimal places.) b. Return on investment. (Round your…
A: The net margin represents a measure of the net profit made by the firm expressed in percentage…
Q: This answer was not correct.
A: Here, Expected Return of Complete Portfolio is 15%
Q: D.e.s.c.r.i.b.e. s.o.m.e. o.f. t.h.e. s.h.o.r.t - t.e.r.m. i.n.v.e.s.t.m.e.n.t…
A: The inflation is said to be the factor that affect the overall purchasing power and hence decision…
Q: The current price of a non-dividend-paying stock is $30. Over the next six months it i expected to…
A: Put options gives you opportunity to sell stock on maturity but there is no obligations to do that…
Q: Consider the two mutually exclusive projects described in the table below. (Note: Each part of the…
A: The difference between the current value of cash inflows and outflow of cash over a period of time…
Q: According to the CAPM, which of the following risks is irrelevant? Select one: a. Unsystematic…
A: CAPM stands for Capital Asset Pricing Model. This theoretical model shows the relationship between…
Q: What is the value of a call option if the underlying stock price is $82, the strike price is $90,…
A: Call options gives the right but not the obligation to buy at the strike price. Using Black Scholes…
Q: You ask a stockbroker what the firm's research department expects for these three stocks. The broker…
A: The Capital Asset Pricing Model is a model that describes the relationship between the expected…
Q: A trader enters into a short position on a call and a long forward position on the same underlying…
A: Long position means we will buy futures now and sell them in future expecting the price increased.…
Q: The calculation of an investor's Risk Aversion (A) requires us to look at that individual investor's…
A: A key idea in finance and investment theory, risk aversion examines how investors behave and what…
Q: Jason makes six EOY deposits of $2,000 each in savings account paying 5% compounded annually. If the…
A: Annually deposit = d = $2000 Interest rate = r = 5%
Q: The following financial data for a firm is provided to you. Calculate the Operating Cash Flow and…
A: Operating cash flow (OCF) the cash flow a firm generates from its normal operations calculated as…
Q: Hansi is promised to receive $89 in 9 years. Hansi, being profligate, prefers to spend this promised…
A: Future value = fv = $89 Time = t = 9 years Interest rate = r = 6%
Q: You buy an annuity that will pay you $24,000 annually for 25 years. The payments are paid on the…
A: This problem belongs to finding out the present value of annuity due. When annuity occurs in the…
Q: If he holds a $12.0 million portfolio of Waterworks stock and wishes to hedge market exposure for…
A: hedging ratio is (value of the portfolio/future contracts)*beta of the portfolio future contracts…
Q: You have $7000 to invest. The mutual fund you are considering offers two classes of shares. Class A…
A: Mutual funds are traded as unit of pooled fund from investors where funds are invested in different…
Q: Consider an investment that pays off $800 or $1,500 per $1,000 invested with equal probability.…
A: Expected values is the sum of all possible returns with their probability of occurrence. Standard…
Q: Which of the following is an example of a capital expenditure? Select all that apply A- New…
A: Capital Expenditure is that expenses which is incurred by the company on long term assets such as…
Q: Coore Manufacturing has the following two possible projects. The required return is 11 percent.…
A: Years Project Y 0 ($28,800) 1 $14,800 2 $13,200 3 $15,600 4 $11,200 Years Project…
Q: Graham Potato Company has projected sales of $10,200 in September, $13,500 in October, $20.200 in…
A: Cash budget is used to estimate cash inflows (cash receipts) and cash outflows (cash payments) of a…
Q: 4) 1) Miguel is attending a 2-year college. As a freshman, he was approved for a 10-year, federal…
A: Principal Amount = $3100 Rate of Interest = 4.29% No. of years = 2.5
Q: Project A and Project B are mutually exclusive. Project A has an IRR of 22.5 and Project B has an…
A: Net present value (NPV):The net present value is a technique used for making the investment…
Q: Last year, a stockholder purchased 25 shares of Zycodec at its lowest price of the year. What is the…
A: The investor purchase the share at lower price and sell this year's at higher price in order to…
Q: Jordie Systems Co. plans to issue bonds with a par value of $1,000 and 20 years to maturity. These…
A: A bond is an instrument used by companies to raise debt capital from investors. The bonds are issued…
Q: ACCOUNT INFORMATION Type Revolving Account Number 234 98765 90 Billing Date 16 Aug Payment Due Date…
A: Credit cards are now very common now days and buying and selling can be done through credit cards…
Q: You are trying to figure out the risk-free rate estimate. Here is information about a stock's CAPM…
A: As per the CAPM model return can be calculated as under. Stock Return = Risk free Return + (Return…
Q: Suppose that you are attempting to raise money for new business venture. Beginning one month from…
A: In case of free cash flow in perpetuity, business valuation can be calculated by using below…
Q: When interest rates increase, with all else remaining the same, which of the following is true? Both…
A: Data given: Both calls and puts decrease in value Calls increase in value while puts decrease in…
Q: What are the calculations at the end of bii) and c) as it cuts off and I am unable to see it?
A: Here, Particulars Values Face value of UK Bond (FV) £ 1,000.00 Yield to Maturity (RATE) 6%…
Q: Company Y has a target debt ratio of 55%. Currently its debt ratio is 60% and it expects to revert…
A: Here, Target Debt Ratio is 55% Cost of Equity is 20% Interest payment is R1,000,000 Liabilities is…
Q: (a) Mr Adani invests in two risky securities with the following details: Security 1: r₁=0.16;…
A: I ) 40% in Security 1 and 60% in Security 2: Return Return of Portfolio = Return from Security 1 *…
Q: When the non-dividend paying stock price is $20, the strike price is $20, the risk-free rate is 5%,…
A: Put options are employed as a type of insurance or protection against potential downside risk in a…
Q: An all-equity company decides to recapitalize. The company has an unlevered beta of 1.1, the market…
A: unlevered beta = ub = 1.1 Market risk Premium = mrp = 6% Risk free rate = rf = 5% Tax rate = t =…
Q: Thomas has started working, and he will be putting $100 aside, at the end of every month, to…
A: Here, Particulars Values Present value (PV) $ 0 Monthly deposits (PMT) $ 100.00 Future…
Q: Find the future value of a simple interest loan where $1,950 is borrowed at a rate of 7.9% from…
A: Loan amount = $1950 Interest rate = 7.90% Period = October 7 to October 27
Q: Question (1): Three months ago, Jim purchased $X1 of U.S. Treasury bonds. These bonds have a 30-year…
A: X1 is $27000 X2 is 4% Par Value is $1,000 The amount of the Quarterly Dividend is $1000×4%4=$10 The…
Q: Kate and her brother Rustin own a piece of property in Dallas as tenants in valued at $50,000. Kate…
A: In mortgage loan the property is collateral against loan and if there is default on loan than…
Q: Following is financial information for three ventures: Venture XX Venture YY Venture ZZ…
A: Particulars Venture XX Venture YY Venture ZZ After-tax property margins 5% 25% 15% Asset…
Q: Real estate does not include land. permanent structures. furniture. mineral rights.
A: Real estate is the land and any permanent structures like home or any improvements attached to the…
Q: The Jeffersons have asked you what would be needed to fund the children’s future college costs.…
A: First year fee = Current fee * (1 + g)^n, Whereas ; n = 18, g = 5% First year fee = 24,000 * (1 +…
Q: Assume that you have an opportunity to buy the stock of CoolTech, Inc., an IPO being offered for…
A: Value of firm = value of equity + value of debt + value of Preferred stocks.
Q: You earn $17.50/hr and work 40 hr/wk. Your deductions are FICA (7.65%), federal tax withholding…
A: Emergency fund refers to the amount of cash that is kept aside as a reserve for the expenses that…
Q: Hood Corp bonds have 19 years remaining until maturity, a 7% coupon rate, and a YTM of 4.2%. What is…
A: Compound = semiannual = 2 Time = t = 19 * 2 = 38 Coupon rate = 7 / 2 = 3.5% Yield To maturity = ytm…
Sub : Finance
Pls answer very fast.I ll upvote. Thank You
An all-equity company decides to recapitalize. The company has an unlevered beta of 1.1, the market risk premium is 6% and the risk-free rate is 5%. The company's tax rate is 25%.
- If the company starts to borrow with a 25% debt ratio, what will be the levered beta using Hamada’s equation?
- What is the
cost of equity before and after the recapitalization respectively? - Why is the cost of equity higher after the recapitalization?
Trending now
This is a popular solution!
Step by step
Solved in 4 steps
- Now consider the case of another company: US Robotics Inc. has a current capital structure of 30% debt and 70% equity. Its current before-tax cost of debt is 8%, and its tax rate is 25%. It currently has a levered beta of 1.25. The risk-free rate is 3.5%, and the risk premium on the market is 8%. US Robotics Inc. is considering changing its capital structure to 60% debt and 40% equity. Increasing the firm’s level of debt will cause its before-tax cost of debt to increase to 10%. First, solve for US Robotics Inc.’s unlevered beta. Use US Robotics Inc.’s unlevered beta to solve for the firm’s levered beta with the new capital structure. Use US Robotics Inc.’s levered beta under the new capital structure, to solve for its cost of equity under the new capital structure. What will the firm’s weighted average cost of capital (WACC) be if it makes this change in its capital structure? 11.78% 12.40% 8.06% 9.30%Hello. I need help with the following question please. Wentworth Industries is 100 percent equity financed. Its current beta is 0.6. The expected market rate of return is 17 percent and the risk-free rate is 9 percent. Round your answers to two decimal places. Calculate Wentworth’s cost of equity. If Wentworth changes its capital structure to 20 percent debt, it estimates that its beta will increase to 0.8. The after-tax cost of debt will be 9 percent. Should Wentworth make the capital structure change? Based on the weighted cost of capital of %, the capital structure changed.An all equity financed company currently has a beta of 1.2 and a marginal tax rate of 20%. The expected return on the market is 8%. The risk-free rate of return is 3%. The company's before-tax cost of debt is 5%. The company decides to alter its capital structure and will target 50% debt, which will remain constant. What is this company's new weighted average cost of capital (WACC)? a) 6.5% b) 7.7% c) 8.9% d) 10.2%
- Ethier Enterprise has an unlevered beta of 0.5. Ethier is financed with 25% debt and has a levered beta of 0.6. If the risk free rate is 3.5% and the market risk premium is 5%, how much is the additional premium that Ethier's shareholders require to be compensated for financial risk? Round your answer to one decimal place.A company is considering its optimal capital structure. The firm currently has 1 million shares outstanding at $ 20 per share (tax rate = 40%) and a debt balance of $5 million. Currently, its (levered) beta is 1.5 and its ERP is 5.5%. The current risk-free rate is 5%. Your research indicate the following ratings and pre-tax cost of debt across the different debt ratios: D/(D+E) Rating Pre-tax cost of debt 0% AAA 10% 10% AA 10.5% 20% A 11% 30% BBB 12% 40% BB 13% 50% B 14% 60% CCC 16% 70% CC 18% 80% C 20% 90% D 25% a. Using the optimal WACC approach, what is the firm's optimal debt ratio? b. Calculate the company's unlevered value, assuming that the probability of default is 5% and the company loses 30% of its value in the event of a default.Rolex, Inc. has equity with a market value of $20 million and debt with a market value of $10million. Assume the firm has no default risk and can borrow at the risk-free interest rate. Therisk-free interest rate is 5 percent per year, and the expected return on the market portfolio is11 percent. The beta of the company's equity is 1.2. The tax rate is 20%. What is the cost ofcapital for an otherwise identical all-equity firm? handwrite please
- Give typing answer with explanation and conclusion Jenkins, Inc., has equity with a market value of $23.5 million and debt with a market value of $11.75 million. The cost of debt is 8 percent per year. Treasury bills that mature in one year yield 4 percent per year, and the expected return on the market portfolio over the next year is 10 percent. The beta of the company’s equity is 1.2. The firm pays no taxes. a. What is the company’s debt-equity ratio? (Do not round) a. Debt-equity ratio b. weighted average cost of capital c. cost of capitalI need help, please show me the calculation Questions: The cost of capital for a firm with a 60/40 debt/equity split, 4.5% cost of debt, 15% cost of equity, and a 35% tax rate would be? The risk free rate currently have a return of 2.5% and the market risk premium is 4.22%. If a firm has a beta of 1.42, what is its cost of equity? How much should you pay for a share of stock that offers a constant growth rate of 10%, requires a 16% rate of return, and is expected to sell for $77.77 one year from now?A group of investors is intent on purchasing a publicly traded company and wants to estimate the highest price they can reasonably justify paying. The target company’s equity beta is 1.20 and its debt-to-firm value ratio, measured using market values, is 60 percent. The investors plan to improve the target’s cash flows and sell it for 12 times free cash flow in year five. Projected free cash flows and selling price are as follows. ($ millions) Year 1 2 3 4 5 Free cash flows $33 $48 $53 $58 $ 58 Selling price $ 696 Total free cash flows $33 $48 $53 $58 $ 754 To finance the purchase, the investors have negotiated a $480 million, five-year loan at 8 percent interest to be repaid in five equal payments at the end of each year, plus interest on the declining balance. This will be the only interest-bearing debt outstanding after the acquisition. Selected Additional Information Tax rate 40 percent Risk-free interest rate 3 percent Market risk…
- If the financial Manager of Evergreen wants to decrease its cost of capital by adding more debt to its capital structure and arrive at a debt-equity ratio of 0.60. If its debt is in the form of a 6% semiannual bond issue outstanding with 15 years to maturity. The bond currently sells for 95% of its face value of $1000. On the other hand, suppose the risk-free rate is 3% and the market portfolio has an expected return of 9% and the company has a beta of 2. If the tax rate is 40%. Question 1 Calculate the company,s after-tax cost of debt. Question 2 Calculate the company,s cost of equity. Question 3 What would be the company’s overall cost of capital (WACC) at the targeted capital structure of debt equity ratio of 0.60? Question 4 If the company achieves this new cost of capital, would your investment decision change regarding the previous two investment opportunities? Explain your answer.A firm makes a surprise announcement that it is going to have a leveraged recapitalization and will target a debt-to-value ratio of 40% ongoing, at which point the debt will have a beta of 0.2. Before this announcement, the firm had a market cap of €400 million, debt-to-value ratio of 20%, equity beta of 1.2, risk-free debt, and a target debt level policy. The corporate tax rate is 20%. What is the equity beta of the firm after the recapitalizationFFC is trying to establish its optimal capital structure. Its current capital structure consists of 25% debt and 75% equity; however, the CEO believes that the firm should use more debt. The risk-free rate, rRF, is 4%; the market risk premium, RPM, is 5%; and the firm’s tax rate is 40%. Currently, FFC has beta of 1.5. What would be FFC’s estimated cost of equity if it changed its capital structure to 40% debt and 60% equity? Should the company opt new capital structure, decide based on the cost of equity computations?