Bulldogs Inc., a 100% equity finance entity, is considering the formation of a new division that will increase the assets of the firm by 50%. Bulldogs Inc. currently has a required rate of return of 18%, Treasury bonds yield 7%, and the market risk premium is 5%. What is the maximum beta coefficient the new division could have, if Bulldogs Inc. wants to reduce its required rate of return to 16%? 1.8 1.0 2.3 1.7

Bulldogs Inc., a 100% equity finance entity, is considering the formation of a new division that will increase the assets of the firm by 50%. Bulldogs Inc. currently has a required rate of return of 18%, Treasury bonds yield 7%, and the market risk premium is 5%. What is the maximum beta coefficient the new division could have, if Bulldogs Inc. wants to reduce its required rate of return to 16%? 1.8 1.0 2.3 1.7

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter11: Capital Budgeting And Risk

Section: Chapter Questions

Problem 6P

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Bulldogs Inc., a 100% equity finance entity, is considering the formation of a new division that will increase the assets of the firm by 50%. Bulldogs Inc. currently has a required rate of return of 18%, Treasury bonds yield 7%, and the market risk premium is 5%. What is the maximum beta coefficient the new division could have, if Bulldogs Inc. wants to reduce its required rate of return to 16%? a. 1.8 b. 1.7 c. 1.0 d. 2.3
Tangshan Mining Company must choose its optimal capital structure. Currently, the firm has a 40 percent debt ratio and the firm expects to generate a dividend next year of $4.89 per share and dividends are grow at a constant rate of 5 percent for the foreseeable future. Stockholders currently require a 10.89 percent return on their investment. Tangshan Mining is considering changing its capital structure if it would benefit shareholders. The firm estimates that if it increases the debt ratio to 50 percent, it will increase its expected dividend to $5.24 per share. Because of the additional leverage, dividend growth is expected to increase to 6 percent and this growth will be sustained indefinitely. However, because of the added risk, the required return demanded by stockholders will increase to 11.34 percent. Determine the value per share for Tangshan Mining under both the current and proposed capital structure ? A. $74.01 and $79.02 B. $67.03 and $65.51 C. $82.03 and $98.12 D.…
Tangshan Mining Company must choose its optimal capital structure. Currently, the firm has a 40 percent debt ratio and the firm expects to generate a dividend next year of $4.89 per share and dividends are grow at a constant rate of 5 percent for the foreseeable future. Stockholders currently require a 10.89 percent return on their investment. Tangshan Mining is considering changing its capital structure if it would benefit shareholders. The firm estimates that if it increases the debt ratio to 50 percent, it will increase its expected dividend to $5.24 per share. Because of the additional leverage, dividend growth is expected to increase to 6 percent and this growth will be sustained indefinitely. However, because of the added risk, the required return demanded by stockholders will increase to 11.34 percent. Determine the value per share for Tangshan Mining under both the current and proposed capital structure ?
Adamson Corporation is considering four average-risk projects with the following costs and rates of return: Project Cost Expected Rate of Return 1 $2,000 16.00% 2 3,000 15.00 3 5,000 13.75 4 2,000 12.50 The company estimates that it can issue debt at a rate of rd = 9%, and its tax rate is 35%. It can issue preferred stock that pays a constant dividend of $6 per year at $57 per share. Also, its common stock currently sells for $39 per share; the next expected dividend, D1, is $4.50; and the dividend is expected to grow at a constant rate of 5% per year. The target capital structure consists of 75% common stock, 15% debt, and 10% preferred stock. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below. What is the cost of each of the capital components? Round your answers to two decimal places. Do not round your intermediate calculations. Cost of debt _________% Cost…
Adamson Corporation is considering four average-risk projects with the following costs and rates of return: Project Cost Expected Rate of Return 1 $2,000 16.00% 2 3,000 15.00 3 5,000 13.75 4 2,000 12.50 The company estimates that it can issue debt at a rate of rd = 9%, and its tax rate is 35%. It can issue preferred stock that pays a constant dividend of $3 per year at $44 per share. Also, its common stock currently sells for $36 per share; the next expected dividend, D1, is $3.75; and the dividend is expected to grow at a constant rate of 7% per year. The target capital structure consists of 75% common stock, 15% debt, and 10% preferred stock. A. What is the cost of each of the capital components? Round your answers to two decimal places. Do not round your intermediate calculations. Cost of debt Cost of preferred stock Cost of retained earnings B. What is Adamson's WACC? Round your answer to two decimal places. Do not round your intermediate calculations.
Halfdome believes that its optimal capital structure consists of 55% common equity and 45% debt, and its tax rate is 25%. Halfdome must raise additional capital to fund its upcoming expansion. The firm will have $4 million of retained earnings with a cost of . New common stock in an amount up to $8 million would have a cost of . Furthermore, Halfdome can raise up to $4 million of debt at an interest rate of and an additional $5 million of debt at . The CFO estimates that a proposed expansion would require an investment of $8.2 million. What is the weighted average cost of capital (WACC) for the last dollar raised to complete the expansion? (Assume that cost of debt is 9% and cost of equity is 12.5%). 12.69% 8.45% 10.32% 9.91% None of the above
Adamson Corporation is considering four average-risk projects with the following costs and rates of return: Project Cost Expected Rate of Return 1 $2,000 16.00% 2 3,000 15.00 3 5,000 13.75 4 2,000 12.50 The company estimates that it can issue debt at a rate of rd = 10%, and its tax rate is 25%. It can issue preferred stock that pays a constant dividend of $6.00 per year at $56.00 per share. Also, its common stock currently sells for $43.00 per share; the next expected dividend, D1, is $3.75; and the dividend is expected to grow at a constant rate of 7% per year. The target capital structure consists of 75% common stock, 15% debt, and 10% preferred stock. What is the cost of each of the capital components? Do not round intermediate calculations. Round your answers to two decimal places. Cost of debt: % Cost of preferred stock: % Cost of retained earnings: % What is Adamson's WACC? Do not round intermediate calculations. Round your answer to…
Adamson Corporation is considering four average-risk projects with the following costs and rates of return: Project Cost Expected Rate of Return 1 $2,000 16.00% 2 3,000 15.00 3 5,000 13.75 4 2,000 12.50 The company estimates that it can issue debt at a rate of rd = 9%, and its tax rate is 25%. It can issue preferred stock that pays a constant dividend of $4.00 per year at $57.00 per share. Also, its common stock currently sells for $41.00 per share; the next expected dividend, D1, is $3.75; and the dividend is expected to grow at a constant rate of 7% per year. The target capital structure consists of 75% common stock, 15% debt, and 10% preferred stock. What is the cost of each of the capital components? Do not round intermediate calculations. Round your answers to two decimal places. Cost of debt: % Cost of preferred stock: % Cost of retained earnings: % What is Adamson's WACC? Do not round intermediate calculations. Round your answer to two…
Potter Inc. is trying to estimate its optimal capital structure. Right now, Potter Inc. has a capital structure that consists of 20 percent debt and 80 percent equity. The risk-free rate is 6 percent, and the market risk premium is 5 percent. Currently the company’s cost of equity, which is based on the CAPM, is 12 percent and its tax rate is 40 percent.What is the new levered beta given the new capital structure? a1.67 b1.039 c1.409 d1.24 What would be Potter Inc.’s estimated cost of equity if it were to change its capital structure to 50 percent debt and 50? a14.35% b30.00% c14.72% d15.60%
Adamson Corporation is considering four average-risk projects with the following costs and rates of return: Project Cost Expected Rate of Return 1 $2,000 16.00% 2 3,000 15.00 3 5,000 13.75 4 2,000 12.50 The company estimates that it can issue debt at a rate of rd = 10%, and its tax rate is 25%. It can issue preferred stock that pays a constant dividend of $4.00 per year at $48.00 per share. Also, its common stock currently sells for $33.00 per share; the next expected dividend, D1, is $4.25; and the dividend is expected to grow at a constant rate of 4% per year. The target capital structure consists of 75% common stock, 15% debt, and 10% preferred stock. What is the cost of each of the capital components? Do not round intermediate calculations. Round your answers to two decimal places. Cost of debt: % Cost of preferred stock: % Cost of retained earnings: % What is Adamson's WACC? Do not round intermediate calculations. Round your answer to two…
Blue Co. is trying to estimate its optimal capital structure. Currently, the firm has a capital structure that consists of 20% debt and 80% equity. The risk-free rate is 6% and the market risk premium is 5%. The company’s cost of equity is 12% under the capital asset pricing model approach and its corporate tax rate is 40%. What is the new levered beta if the capital structure will shift from its current structure to 50% debt and 50% equity? a. 1.67 b. 1.39 c. 1.49 d. 1.25
Laiba Corporation (LC) is considering a large-scale recapitalization. Currently, LC is financed with 100 percent equity. The beta on its common stock at the current level is 1.25, the risk free rate is 8 percent, the market return is 14 percent, and LIC faces a 40 percent federal-plus-state tax rate. Required: What is LIC’s current cost of equity? What is LIC’s unlevered beta? If the company wants to recapitalize its capital structure, increase its debt by 30% and 70% equity. What will be the new beta and new cost of equity if LC recapitalizes? What if the company recapitalize its capital structure to 50% debt and equity, what will be new beta and new cost of equity?