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: If a trader developed a series of algorithms and bots to help her profit from predictable price…
A: In this algorithm trading, we need to look at each trade when the trade would get executed.
Q: Find the NPV of a project that costs $694,000 today and generates expected cash flows in each of the…
A: NPV is also known as Net Present Value. It is a capital budgeting techniques which help in decision…
Q: Which of the following describes delta? The ratio of the option price to the stock price None of…
A: The simplest form of delta hedging entails an investor purchasing or disposing of options, and then…
Q: Islander Corporation's common stock will pay a dividend of $3.50 one year from now. You plan to buy…
A: Next year dividend = d1 = $3.50 Next year price of stock = p1 = $70 Rate of return = r = 18%
Q: Carter Communications does not currently pay a dividend. You expect the company to begin paying a…
A: Price of stock can be determined using the dividend discounting model(DDM) of constant growth.
Q: You want to buy a used Mini Cooper when you graduate. Based on the job offer you have accepted, your…
A: When the lender lends a loan to the borrower, he charges a rate of interest on the borrowed amount.…
Q: which the property is expected to be sold
A: To calculate the internal rate of return (IRR) of the investment opportunity, we need to calculate…
Q: Franny Realty loaned money and received the following notes during 2024. (Click the icon to view the…
A: The idea of the time value of money (TVM) holds that a quantity of money is worth more now than it…
Q: a）You purchased an annual interest coupon bond one year ago that now has six years remaining until…
A: Intrinsic value of a bond is the total of present value of future coupon interest payment and…
Q: C.Financial Statement Analysis. Using the data below please compute for the following. Income…
A: Financial statement analysis is the process of reviewing a company's financial statements in order…
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: SHARPE RATIO: TREYNOR RATIO JENSEN'S ALPHA INFORMATION RATIO R-SQUARED
A: First, we need to determine the following of each of the assets.Average return with excel function…
Q: How does capital protect a bank from failure? Why are banks currently holding capital well above…
A: Introduction: Capital is a bank's own funds and it is the money obtained from its shareholders and…
Q: st rate. Between now and year 1 (period 0 and period 1), uncertainty will be resolved immediately…
A: With expected interest rate (r) and period (n), the expected value of the zero coupon bond is…
Q: A firm has a current capital structure consisting of R400,000 of 12 percent annual interest debt and…
A: debt = 400000 interest rate = 12% interest expense = 400000*12% = 48000
Q: DeltaCo has a payout ratio of 0.6 and it reinvests the remainder of earnings in new projects. If…
A: Payout ratio = 0.60 Earnings per share = $7.18 Expected return = 15% Required rate of return = 10.8%
Q: . Calculate the payback period. 2. Calculate the accounting (simple) rate of return. 3. Calculate…
A: First, we need to build the cash flow over the years using the formula below:Year 0 = Initial…
Q: years to pay for his college tuition. He says that he typically earns around $300 per day, and all…
A: A pro forma statement is prepared considering the expected sales and all expected costs and expenses…
Q: If you bought one of these bonds today, what is your expected rate of return? (Round answer to 2…
A: As per instruction question 8.30(c) will be attempted. YTM is the annual return that the bond…
Q: machinery costing $420,000. The Sisyphean Company expects cash inflows from this project as detailed…
A: Years Cash Inflow / Outflow PV Factor @ 17% PV of Cashflows 0 -4,20,000.00…
Q: Kate and her brother Rustin own a piece of property in Dallas as tenants in comm valued at $50,000.…
A: In mortgage loan the property is collateral against loan and if there is default on loan than…
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: Sub-Prime Loan Company is thinking of opening a new office, and the key data are shown below. The…
A: Net present value is the modern method of capital budgeting that is used to determine the present…
Q: Jeffersons are considering selling their current residence, buying a small home near Avery’s parents…
A: Mortgage loans are very common when buying homes and these secured loans against home as collateral…
Q: Illustration 2 • Annual returns for three funds and a market index are given below: Rp Op Fund A…
A: So when are we are analysing the performance of different fund we will be considering the total risk…
Q: For the example below, list and describe the input(s) (observable or unobservable) and valuation…
A: Level 1 - Quoted Prices in Active Markets: It includes inputs that are based on quoted prices in the…
Q: Advantages of mutual funds include Odiversification. professional management. Ⓒliquidity. (All of…
A: Introduction: Mutual fund-It is a type of investment that pools funds from investors and invests…
Q: Two enterprises, X and Y, own 100% of the stock of JV, a joint venture. All the equity, $10…
A: It is a case of variable interest entity (VIE) that is also applicable in the context of joint…
Q: Considering trading days only, Microsoft Corporation (MSFT) has an expected return of 11.67%…
A: Expected return are the returns required by the investor, who has calculated the risk and return of…
Q: Question 30 The graph below shows the value of a 2-month, $40-strike call option as a function of…
A: Here, Strike Price is $40 Time To Maturity is 2 months Risk Free Rate is 8% Standard Deviation is…
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: Explain the role of agency conflicts between managers, shareholders, and bondholders in corporate…
A: In simple term agency problem refers to the conflict of interest between the interest of the…
Q: ULTIPLE CHOICE. Answer the following: 1.It show how efficient the business is as to its purchase or…
A: Ratios are very important in the comparing the performance of company with other similar companies…
Q: The ultimate authority of a fund's track record is its current profile prospectus.
A: the ultimate authority of a funds track record is not its current profile prospectus but includes…
Q: Consider a project with free cash flows in one year of $90,000 in a weak economy or $117,000 in a…
A: A company's average after-tax cost of capital from all sources, including common stock, preferred…
Q: Determine P.
A: 2 / 2 To determine the initial price (P) of the bond, we need to calculate the present value of…
Q: the nominal discount rate convertible monthly that corresponds to a nominal interest rate of 4%…
A: To determine the nominal discount rate convertible monthly that corresponds to a nominal…
Q: also increase at the same rate if the current excess capacity did not exist. Assume that AHAI's…
A: First we need to determine the change in sales using the formula below: Change in sales = Expected…
Q: Based on the chart above, which portfolio is “better” based on Markowitz approach to portfolio…
A: Markowitz theory states that the investors should try to make portfolio which maximizes its return…
Q: Pls answer very fast.I ll upvote. Thank You Bobbie has $6,000 that she wants to invest today to…
A: Future value refers to the function of time, value, and money used for estimating the value of the…
Q: The current price of a non-dividend paying stock is $30. Use a two-step tree to value a European…
A: The binomial options pricing model refers to the technique of pricing options where the price of the…
Q: You find the following corporate bond quotes. To calculate the number of years until maturity,…
A: Bond price refers to the value that is generated by the bond as the present discounted value of all…
Q: Seeing the Financial Side of Business RA Dr. Stephen Hill, a successful optometrist in Indianapolis,…
A: Financial institutions' main function is to act as middlemen between borrowers and lenders. They…
Q: Which of the following is NOT true? In risk-neutral valuation the risk-free rate is used to discount…
A: Risk-neutral valuation produces a valuation that is correct in all situations not just those where…
Q: A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a…
A: An optimal portfolio refers to a portfolio of investments that offers the highest expected return…
Q: Charlie's Hamburgers is considering adding pizza to its menu. The pizza require purchasing cooking…
A: Year Cash Flows 0 ($16,000) 1 $4,700 2 $5,100 3 $5,400 4 $5,800 5 $6,000 6 $6,200…
Q: We are considering an investment opportunity with the following projected cashflow Year CF Plan A…
A: Net present value refers to the method of capital budgeting used for estimating the difference…
Q: NextEra Energy, Inc. (NEE), is expected to pay an annual dividend of $5.6 in t=1. Annual dividends…
A: Stock price is the present value of all future dividends. In case of Dividend is paid in perpetuity,…
Q: A European call and a European put on a stock have the same strike price and time to maturity. At…
A: Call and Put Option: On the derivatives market, the two primary options are call option and put…
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…
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?
Step by step
Solved in 5 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.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 pleaseGive 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 capital
- I 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?ABC, Inc. has equity beta of 1.75 with total assets financed with 80% of equity. The expected excess return on the market is 7 percent, and the risk-free rate is 3 percent. The firm is considering cutting total equity to 60% of total value. What would the cost of equity be if the firm meets its target?